Why Canada’s Hottest Shale Play is Catching the Eye of US Producers

Summary

• US firms eye Canada’s Montney due to depleted US shale prospects
• Montney offers room to grow with comparatively untapped geology
• Rising interest in Canada’s oilpatch comes after a decade of reduced foreign investment

(Reuters) – U.S. oil and gas producers in search of fresh drilling territory are looking to expand in Western Canada’s Montney basin, a remote yet massive shale play that is already a hotbed of M&A activity and could see more deals soon, according to executives, analysts and advisors.

Extensive drilling in U.S. shale fields over the past 15 years or so has made the country the world’s biggest oil producer. Drilling prospects in the Permian, the largest U.S. oilfield extending across Texas and New Mexico, are becoming less attractive to oil producers after such a long period of expansion because the area left with potential for high production is shrinking. In contrast, the Montney is relatively untapped, prompting Texan shale pioneers to look to the Canadian play for future growth.

“Everyone is hunting for inventory,” said Clint Barnette, director of geology at Indigo Energy Advisors, a unit of advisory firm Efficient Markets. “Operators are broadening their horizons and trying to find inventory that can be secured for less.”

The Montney, which spans 130,000 km across northeast British Columbia and northwest Alberta, is currently dominated by Canadian natural gas drillers such as ARC Resources  and Tourmaline Oil.

The region produces about 10 billion cubic feet per day of natural gas, about 50% of Canada’s total production. Canadian companies have snapped up Montney acreage in recent years as they prepare to increase supply to feed the country’s new liquefied natural gas export industry.

Acquiring land in the Montney is much cheaper than in the Permian. Drilling locations in the U.S. field are as much as six times the price of those in the Montney, said Michael Spyker, principal analyst at Canadian upstream advisory firm HTM Energy Partners. Just two to three years ago, the premium for the Permian was much less – at double the cost of the Montney, he said.

“As that gap widens, it’s almost your fiduciary duty to say ‘We have to at least be abreast and aware of what’s happening in Canada’,” Spyker said.

More than 20 private equity-backed U.S. oil and gas companies are now looking at the Montney and other Canadian oilfields in various capacities, he said.

Two sources involved in oil and gas dealmaking also said a number of private and public U.S. companies have been exploring potential acquisitions in Canada.

U.S. COMPANIES REGISTER MONTNEY INTEREST

This year alone, the Montney accounted for 28% (C$8.6 billion) of the transaction value of M&A deals in Canada’s oilpatch, according to Sayer Energy Advisors.

U.S. operators were among those involved, although most of this year’s deals were between Canadian companies. In November, Denver-based Ovintiv  expanded its footprint in the region with a $2.7 billion takeover of NuVista Energy. Prior to that, in October, U.S. private equity groups NGP Energy Capital Management and Carlyle funded Cygnet Energy’s takeover of Kiwetinohk Energy, which has assets in the Montney, as well as the Duvernay shale field.

Other U.S. companies have also been sniffing around. SM Energy, EOG Resources and Chord Energy  placed unsuccessful bids on Montney assets or expressed interest in bidding for Montney assets this year, two sources said.

The sources requested anonymity to discuss confidential details. SM and EOG declined to comment. Chord did not respond to requests for comment.

According to Enverus, the Montney has the longest resource lifespan of all North American unconventional oil and gas plays, with more than 45 years of drilling inventory remaining at the current pace of development.

By contrast, Enverus estimates the Permian basin has approximately 11 years of drilling inventory remaining at its current pace of development.

“The Montney is one of the world-class condensate and gas resources in North America. So yes, there’s a lot of interest,” John Gorman, Halliburton’s vice-president for Canada, told Reuters on the sidelines of an industry conference in Calgary.

POTENTIAL FOR GROWTH

The renewed U.S. interest is notable because foreign direct investment in the Canadian energy sector declined significantly in the years after 2015.

During that period, lower oil prices, the rise of ESG investing and perceived political and regulatory barriers in Canada deterred many international and U.S. firms from pursuing Canadian assets, and global majors largely departed Canada’s oil sands.

The result is that the Montney has been under-invested, compared to other North American locations, said Ovintiv CEO Brendan McCracken in an interview.

“The silver lining of that under-investment is a lot of remaining undeveloped resource at a time when the (United States) is seeing its resource mature,” McCracken said.

Oil production from the Montney is relatively small at just over 90,000 barrels per day, about 2% of Canada’s total, but it has more than doubled in the last decade, according to RBN Energy statistics. That’s thanks in part to advances in the same type of horizontal drilling technologies that powered the U.S. shale boom.