The biggest energy story in North America is currently Alberta, Canada. Alberta holds most of the oil and gas reserves and almost all of the oil sands of the Western Canadian Sedimentary Basin, which extends from the Rocky Mountains to the Canadian Shield, and which contains one of the world's largest reserves of petroleum and natural gas.
The opportunity, and the challenge, is to extract and export these resources to where demand for them is the greatest. Until now, the Western Canadian Sedimentary Basin has supplied much of the North American market. Other contributors have pointed out U.S. continental plays. More recently however, Asia’s growing demand for oil and gas has lead to the emergence of a new target market for Canadian producers.
Clean natural gas is especially sought by Japan and emerging Asian economies. The reason they are now looking for suppliers in Canada is the widening price differential between North American gas and Asian liquefied natural gas (LNG). Long-term LNG contracts are being indexed at 0.15x oil price, implying a gas price which is almost four times greater than that over North American gas. Canadian LNG exports have the potential to be more competitively priced than the Australian projects, whose costs are becoming too high.
Kitimat on the West Coast of British Columbia has become the favoured location for future exports to Asia, allowing Canadian exporters to diversify away from the U.S. Planned export volumes from the Kitimat Terminal would be about 20% of current Canadian gas exports to the U.S. Investments that will make these exports possible have recently been agreed. In October 2011, Royal Dutch Shell (NYSE:RDS.A), (NYSE:RDS.B) and its partners, China National Petroleum, Korean Kogas, and Japanese Mitsubishi (OTC:MIELF), purchased the Kitimat marine terminal as a site for a future LNG export terminal. Shell’s venture is anticipated to deliver two billion cubic-feet-a-day of LNG.
Shell’s is the third LNG proposal for Kitimat. KM LNG, a partnership of Apache Oil (NYSE:APA), OEG Resources and Encana (NYSE:ECA) has received a Canadian National Energy Board licence to ship 1.4 billion cubic feet of gas a day from a plant that is still being built. A scheme by the Haisla First Nation, representing the interest of Canadian indigenous peoples from the Kitimat region, and American LNG Partners for a terminal to process 125 million cubic feet of gas a day is in the regulatory approval process. The combined value of the three planned Kitimat LNG plants and associated pipelines is estimated at $10 billion.
Two recent deals demonstrate Asian interest for Canadian oil and gas firms. For a total of $1.09 billion, Malaysia’s national energy company Petronas has entered a joint venture with Progress Energy Resources (OTC:PRQNF). Petronas acquired 50% of Progress’ interest in North Montney properties in British Columbia and Alberta. Petronas and Progress have also established an LNG export joint venture which is 80% respectively 20% owned. That JV will explore the potential for yet another LNG export facility in British Columbia.
The second deal is the recently completed $2.24 billion acquisition by Sinopec (NYSE:SNP) of Daylight Energy, whose production and reserves are mostly in natural gas. This transaction illustrates that Canadian regulatory approvals are not an obstacle for acquisitions of local resource firms by foreign entities. On the contrary, such deals are perceived as positive for investments in Canada as they will provide capital to develop its natural assets without any job losses.
As Asian energy firms seek to lock in resource positions, increased M&A activity among Western Canadian oil and gas companies can be expected. It could resemble the consolidation that followed the development of Eastern Australia's coal bed methane as a new LNG source. Increasing debt levels have made most of the following companies, all headquartered in Alberta, more susceptible to a takeover:
Advantage Oil & Gas (NYSE:AAV): The primary focus of Advantage Oil & Gas is on the Montney natural gas play at Glacier, Alberta. The company’s production is 92% gas and 8% oil. As of December 31, 2010, AAV’s reserves were 207.1 million barrels of oil equivalent (mboe). With a market cap of $688.48 million, it is the smallest of the five potential targets. AAV’s total debt to equity ratio is 0.25.
Baytex Energy (NYSE:BTE): Baytex Energy is active in the acquisition, exploration, development, and production of petroleum and natural gas in the Western Canadian Sedimentary Basin and the U.S. As of December 31, 2010, it had proved plus probable reserves of approximately 229 mboe. Its third quarter 2011 revenue was derived 74% from heavy oil, 19% from light oil, and 7% from natural gas. Its market cap is $6.56 billion, and its total debt to equity ratio is 0.56, close to the industry average of 0.50.
Enerplus Resources Fund (NYSE:ERF): Enerplus has an undeveloped natural gas land position in the Deep Basin area, in addition to other conventional natural gas and oil production in Canada and the U.S. The company has probable reserves of 110,568 thousand barrels of light and medium crude oil; 46,778 thousand barrels of heavy crude oil; 14,507 thousand barrels of natural gas liquids; 1,013,180 million cubic feet (mmcfd) of natural gas; and 24,890 mmcfd of shale gas. Its equity value is $4.58 billion, while its ratio of total debt to equity is 0.20.
Pengrowth Energy (NYSE:PGH): Pengrowth Energy primarily explores for crude oil, natural gas, and natural gas liquids (NYSE:NGL) in the provinces of Alberta, British Columbia, Saskatchewan, and Nova Scotia. As of December 31, 2010, Pengrowth had total proved plus probable reserves of 318.4 mboe, and had an interest in 8,277 gross producing and 2,463 gross non-producing oil and natural gas wells. Its current production mix split evenly into 50% liquids and 50% natural gas. It has a total debt to equity ratio of 0.41 for an equity value of $3.48 billion.
Provident Energy (PVX): Provident Energy owns and manages a NGL midstream services and marketing business in Canada and the U.S. The company extracts, processes, stores, transports, and markets NGLs. Provident currently operates the Taylor to Boundary Lake Pipeline, which carries sweet high vapour pressure hydrocarbon products between British Columbia and Alberta. PVX also provides fractionation, storage, NGL terminaling, loading, and offloading services. It has a market cap of $2.64 billion and the highest total debt to equity ratio among the five companies at 0.90.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.