It’s strange but true – some of the best performing energy stocks in Canada have been the junior GAS stocks.
And there is also an argument that the future may be brighter than previously thought for a select few gas stocks.
All these stocks have three things in common:
1. They have core areas in the Montney formation that straddle the BC-Alberta border.
2. Their wells are liquids-rich, i.e. high Natural Gas Liquid (NYSE:NGL) count, or wet gas count – especially CONDENSATE.
3. They hit big wells, and better understand the multi-zone potential of the Montney
In January Artek (RTK-TSXv) jumped 30% from $1.30 when it announced a well that was 1895 boe/d – including an eye-popping 1000 barrels a day of condensate, which gets roughly the same price as oil. And the stock has kept rising – now at $2.10
Cequence (CQE-TSX) almost doubled from $1.60-$3.10 per share in the last three months as it announced several Montney wells, including one well that was 8 mmcf/d (million cubic feet of gas per day) and 200 bopd of NGLs.
Painted Pony has gone from $6-$11 in the last few months not because of its great Bakken oil lands, but because of its Montney reserves, production and flow rates. One of their wells flowed 13 mmcf/d, and all their wells had more than 20 bbl/mmcf – 20 barrels of NGLs for every million cubic feet of gas.
My own little favourite, Donnybrook Energy (DEI-TSXv) has gone from 23 to 70 cents on its Montney lands – a triple for OGIB subscribers (not many junior gas stocks can say that…).
These stock are popping up because the industry is still improving how well they frack this formation, and are continuing to get higher and higher flow rates. But I think more importantly, the ENTIRE market is now getting just how profitable the NGLs, especially condensate, really are for these producers.
Condensate, or C5, as the industry calls it, is a very light oil, over 50 API, and has a ready market in Alberta as it is used to dilute the goopy, syrupy heavy oil from the oil sands, so it will flow in a pipeline. As oil sands production increases, the need for condensate will keep its price strong power for many years.Doug Ashton, VP Engineering at AJM Consultants in Alberta just posted a great model at their website that shows how just a little condensate can go a long way to improving economics for gas producers:
Doug writes: “At AJM, we were wondering just how much of an impact condensate can have on the economics of a new well, so we ran a few test cases.
“First, we picked a play: the Montney in NE British Columbia and NW Alberta.
“Then, we built a type well: Initial rate, 4,500 Mcf/d. Ultimate reserves, 3.0 Bcf. The production for the well has been profiled to have a very steep initial drop, flattening to around a 20 percent annual decline after about one and a half years.
“Finally, we estimated capital and operating costs based on data in our in-house files, added some royalty incentives (assuming crown lands), loaded in AJM’s December 31, 2010 forecast pricing, and voilà:
“While even the “dry” type well shows fairly robust economics, it is clear that even a small condensate recovery can have a significant impact on the profitability of continued gas drilling in North America.”
(Theirwebsite, www.ajmpc.com, is a great resource of free information for the dedicated oil and gas investor – one of my favourite bookmarks.)
And it’s not just stock prices that are rising in the Montney – land values are going up as well. The Montney generally runs 20-40 bbl/mmcf, but a new liquid-rich play at the bottom, the Duvernay shale (about 1000 m below the Montney), has been shown to have 75 bbl/mmcf and have OGIP (Original Gas In Place) of 5x what the Montney has.
The industry has since paid $800 million for land where the Duvernay is the focus.
Trilogy, Celtic Explorations (CLT-TSX) and Yoho Resources (YO-TSX) are now drilling the Duvernay shale at the bottom of the Montney, and this formation goes out across much of the play. This consortium has found the Duvernay has 100 bcf of Original Gas In Place (OGIP) per section, compared to 20 bcf for the Montney. So recoverable gas in the Duvernay could be 2-3x what it is in the Montney – across much of the play – and with twice the condensate content of the Montney. Many juniors don’t have the $10 million per well to drill the Duvernay – but if it’s there under their property, whomever buys them out almost certainly will.
P.S. Follow these links for more of my research on the Montney gas formation:
The Montney Gas Play: Here’s where the attention is shifting now
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Keith Schaefer is long Donnybrook (DEI-TSXv)