Western Canadian Oil & Gas After 1Q2018: Challenges and Opportunities

Western Canadian Oil & Gas After 1Q2018: Challenges and Opportunities
Published on: May 25, 2018
Author: Gilbert Chan

The internal struggle within Canada – battle between the two provinces Alberta and BC, continues to headline the energy industry here in North America in the past 2 months.  It all started in last year during the British Columbia election in May. At that time the leader of the opposing party NDP John Horgan became the premier of BC by uniting with Green Party.  The 3 important seats of the Green Party became the most powerful swing to make Horgan the new premier of the province.  With that, the 2 parties worked together to stop the Kinder Morgan pipeline project which was approved already by the federal government.  Common sense will tell us that the federal government is more “powerful” than provincial ones……but not the case.  BC government first restricted any increase of bitumen shipments until more spill response studies are being conducted, then after some heated exchange of words, Alberta premier replied by boycotting wines that are coming from BC.  After threatening to take this measure to courts by Horgan, Alberta premier Rachel Notley responded with another drastic measure by passing Bill 12 to regulate the petroleum flow to another province.  During all these times of fights, federal government remains relatively silent and helpless.  Though Justin Trudeau has vowed in public many times he has approved the pipleline and it should move forward, no real action has been taken by the federal government to force BC to accept such facts.

At the end the ultimate winner will probably be all the lawyers…..with millions at stake while piling up service and court fees in the process.

However, for the local and foreign companies that are exploring and producing in Western Canada, it is still a tough pill to swallow because rather than having more potential customers to its end products, the industry is still stuck in shipping to the south of the border only.

With the deadline of the Kinder Morgan pipeline final decision looming (May 31, 2018), the governments of the 2 provinces and Canada are still in talks to try to resolve the issue or delay the outcome.   While the producers in US are reaping in profits, the producers in Western Canada are crying for a game-changing outcome that will benefit the whole industry for years to come.

The energy market in Western Canada presents a very challenging time but may also create many good opportunities for investors who have a long term vision.  We would like to provide some updates for some of the companies that we have been covering since last year.  With the oil price on the rise but natural gas in the lows this year so far, the light oil producers will get the most benefits and continue to deliver more free cash flow.

western canadian oil gas - inplay oil

InPlay Oil (TSX:IPO)  Share Price: $1.84 (May 22, 18’ Closing) Market Cap ~ $125M

The company had a good first quarter with 24% increase in light oil production, and operating netback also improved to $28.33/BOE before any derivative contracts.  Better operation economics mean better funds flow so the company continues to become healthier in its balance sheet.  With most of the gas companies trying to produce more liquids and oils, IPO’s strategy in pushing its Cardium light oil production profile which will result in more benefits mid-term.

IPO’s CEO said it will continue to explore making acquisitions or dispositions with the right timing with the strengthening of the oil price.  The company enjoys a good valuation currently but is still relatively undervalued to some of its peers like Yangarra, Raging River, Surge in terms of multiples of Debt-adjusted-Cash flow, daily production or its reserves. *

*A table of companies’ comparison provided by the company can be shown if anyone requests

western canadian oil gas - Prairie Provident TSX:PPR Oil & gas, Natural Gas, 石油天然气,油气

Prairie Provident Resources (TSX:PPR)  Share price: $0.45 (May 22 Closing) Market Cap ~ $52M

Another company who has a good balanced production profile in the space.  PPR’s first quarter result had its production down, which is mainly due to a disposition of a non-core asset during the quarter.

PPR had successful drilling program during the quarter where the result will add to production in the next 2 quarters.  Commencing in Q3/18, PPR also plans to drill three wells in the Princess area, include an offset to the Princess 1 well and 2 additional wells on the recently acquired lands.

The company also completed the hearing in November when PPR is seeking damages up to $188.9M from Quebec in the termination of the rights to one of the company’s licences in the province.  Any significant damages (expected to be below that sum $) as a result will definitely enhance the financial situation of PPR to become stronger.  CEO of PPR said it may happen any time before the end of this year.

western canadian oil gas - Petrus Resources

Petrus Resources (TSX:PRQ) share price: $1.46 (May 22 Closing) Market Cap ~ $70M

Petrus was one of the companies that suffered from the fall of the natural gas price during the winter times.  The company has gained some ground in May since coming from a 52 week low in April.

It had another solid first quarter with 14% higher production and 3% lower operating expenses comparing to 12 months ago.  Petrus continues to mitigate the gas price risk by pushing forward more toward its Cardium light oil development work in Ferrier.  This year it intends to direct 84% of the capital budget towards such work.  The drilling program will also resume after the breakup, if investors are not familiar with “spring breakup”, it’s a characteristics for Western Canada where the government ban heavy equipment from roads to avoid damage during the spring frost times.   Petrus continues to execute its plan and develop Ferrier steadily.

western canadian oil gas - Return Energy (TSXV:RTN)

Return Energy (TSXV:RTN) – newly featured, share price: $0.07 (May 22 Closing) Market Cap: ~ $8M

The company is currently trading at a low valuation mainly because of its small production profile of ~ 310BOE/D as of April 2018.  However, the company has been active since it completed a financing late last year with an institutional investor.  Its main goal is to develop and produce light sweet oil in the Rycroft core area in NW Alberta.  Return is well-positioned for growth in the Triassic Charlie Lake fairway and, with 100% ownership in the Rycroft gas plant, has greater control in maximizing value for shareholders.


Disclaimer: The Companies featured in this article are clients of NAI Interactive Ltd.  This material is provided for information purposes only and does not bind NAI Interactive Ltd. in any way. It is not intended as a recommendation or an offer or solicitation for the purchase or sale of any security or financial instrument, or to enter into a transaction involving any financial instrument or trading strategy.

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