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Canada’s E&P players make the pitch

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BLOG: Now is a bad time to be a junior Canadian natural gas producer, unless you happen to be named Birchcliff (BIR-T) or Peyto (PEY-T).

The two Calgary companies led Canadian intermediate E&P earnings for the last quarter, with both firms beating consensus expectations on production volumes as well as cash flow. With North American natural gas prices still mired near 10-year lows, most of their peers missed expectations by an average of 8%, according to the RBC Capital Markets recap published on Monday.

Canada's small E&P players are pitching themselves Wednesday at the SEPEC Investor Showcase being held in downtown Calgary and for most of them, it will be a tough sell.

"In the last three years most of the money is gravitating towards liquid names," one prominent Calgary analyst said on background. "Natural gas is just not what the market wants right now."

Dry natural gas accounts for most of the production from Birchcliff and Peyto (89% and 78% respectively). For virtually every other company that heavily weighted in gas, the $3ish US price the market is paying for their product has made turning a profit nearly impossible and, in fact, many of them have shut down production on hopes that prices will rise in the not-too-distant future.

Aggressive cost cutting and impressive land holdings have spared Birchcliff and Peyto that fate, at least for now. And with Celtic Exploration accepting a $3.1-billion bid from Exxon Mobil, those two companies could find themselves next up on the chopping block.

"Their advantage is with Celtic gone there are only a couple of gas-weighted names that will get attention of international investors," the local analyst, who asked not to be identified said. "Birchcliff is one and Peyto is another."

Peyto is "an incredibly lean organization," Darren Gee, the company's chief executive, told me in a telephone interview Wednesday morning, noting just 41 staff work at a company producing 50,000 barrels of energy equivalents per day.

"We are one of the envies of the industry with respect to our cost structure," he said, noting the company has cut total cash costs by 20% from this time a year ago "and we were already leading the industry at this time last year."

On whether he would be open to a takeover offer, Gee made it clear a deal won't come cheap.

"Everybody is for sale at the right price, but we have the distinction of being a company that can definitely grow its share price - we don't have to be taken out because we have no other alternatives - that makes it less compelling for us to sell out for your typical control premium," he said.

"So I would say to any potential acquirer that you better come with a pretty big number."

Birchcliff tried unsuccessfully to sell itself last year, then ended up selling some equity to keep its operations running. Jim Surbey, the company's vice president of corporate development, said another sale process won't be coming anytime soon, and in the meantime Birchcliff has big plans to grow its value.

"There is a fair amount of what I would call unrecognized value in the company and a couple more years will surface a bunch of that value," Survey said in a telephone interview Wednesday morning.

"We're not getting credit for the full amount of gas we're going to recover from [the Montney] play."

The company is planning to expand the natural gas plant they own in northern Alberta in the coming months. It is a bit unusual for a producer to own a plant directly, but Birchcliff seems to have very good reason to stray from the status quo.

"One of the reasons we like to own our plant is it keeps our operating costs down so our netbacks are good even when natural gas prices are extremely low," Surbey explained.

So while it might be a tough sell for many of the SEPAC members presenting to potential investors on Wednesday, those are at least two gas-focused juniors (both will be presenting on Wednesday afternoon) that can still make investors salivate.

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