Natural Gas prices in Western Canada spiked today, with little to no fan fare.
There has been a lot written about the natural gas situation in Canada (see here for an in depth analysis), particularly at Station 2, which is the relevant hub for British Columbia Montney shale gas. Prices had been depressed, as seen in the above chart. However, with the onset of winter weather in Western Canada (8 degrees F in Calgary today), they have rebounded substantially.
Taking a look at Canadian Montney gas focused producers, their stock charts are clearly pricing in the local gas price downturn. Even mid cap "stalwarts" are down 30%+ year to date:
This is particularly remarkable because producers like ARC (OTCPK:AETUF) and Painted Pony (OTCPK:PDPYF) have hedged much of their production, and producers like Peyto (OTCPK:PEYUF) and Chinook (OTCPK:CNKEF) are producing with exceptionally low F&D and LOE costs. Peyto sells into AECO and not Station 2, but the Station 2 situation is relevant for AECO producers as well.
Obviously a short term price spike doesn't mean that Western Canadian natural gas prices will recover in the medium term, especially considering production issues by the area midstream provider Trans Canada (TRP) (which many producers are blaming for the recent pricing disconnect). However, it may mean that the share price collapse of these natural gas producers may be overdone. And it could put pressure on TRP stock, as TRP may have been over earning through low co-generation costs during a period of exceptionally low gas prices (sometimes negative).
I have exposure via Chinook and Painted Pony - Chinook because it has low debt and is trading at an exceptionally low valuation, and Painted Pony because it is hedged and has a great track record of cost effective production growth. However, any of the natural gas producers in the area should benefit from higher local natural gas prices, particularly if this recent price spike sustains.
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Disclosure: I am/we are long CNKEF, PDPYF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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