A near C$855 million ($800 million) deal unveiled early Monday by Imperial Oil for sale of its liquids-rich gas and light oil assets in the Western Canadian Sedimentary Basin is being viewed by several in the industry as a "rekindling" of interest in the large resource play in response to a recent bullish forecast for natural gas prices in Western Canada.
"The Imperial/Whitecap deal is the third acquisition in the WCSB in the past 30 days and is in line with a growing sense that the worst of natural gas prices in Western Canada [are] over," Gary Leach, president of the Explorers and Producers Association of Canada, said Monday. "Given the bullish sentiments, we are expecting more deals over the short to medium term."
On February 19, Canadian Natural Resources said it was buying some 2.2 million net acres of undeveloped land and also six operating gas plants from Devon Energy for C$3.13 billion. This was followed by Progress Energy Canada, a 100% owned subsidiary of Petronas, announcing March 12 the spending of C$130 million to further acquire 33,500 net acres of land at Montney. Also on the same day, as part of building up its natural gas position in the WCSB, Progress said it had closed a C$1.5 billion deal to acquire 127,000 net acres.
Early Monday, Imperial said it had reached an agreement with Whitecap Resources to sells its Boundary Lake, Cynthia/West Pembina and Rocky Mountain House assets in Western Canada that last year were producing a combined 15,000 b/d of oil equivalent.
Production is split evenly between oil and gas, Imperial said in a statement, without providing any reasons for the sale.
"Imperial has a long-standing practice of continually reviewing its assets for their contribution toward meeting the company's strategic operational and financial objectives," Imperial spokeswoman Leanne Dohy, said later Monday in an email.
The company's goal is to maximize the value of its assets to drive profitability and enhance shareholder value, she said.
The acquisition is highly "accretive" to Whitecap and adds a concentrated land and operating base with 6,500 boe/d of high netback production, with a low base decline rate of 16% and significant low risk oil reserves upside, Whitecap said in a statement.
The deal will provide Whitecap with low cost future development and a near-term reduction in overall operating costs, it said.
"The deal is nicely placed with Whitecap's resources in the nearby West Pembina and Cardium plays and does not come as a surprise," Jim Byrne with BMO Capital Markets said Monday.
"The transaction is also not over-priced, as low decline and high-netback assets do not come cheap," he said.
As a next step, Byrne said, Whitecap will now integrate the newly-acquired assets after the deal closes on May 1 into its core properties and continue with its policy of delivering more dividends to shareholders.
No comments were immediately available from Whitecap, but the company said early Monday the deal will boost its production to 33,500 boe/d and a payout ratio of 96% in mid-2014, reducing to 84% in 2015.
STRATEGIC SHIFT
With AECO-hub gas prices in Western Canada forecast to rise to C$4/MM Btu by the year end, and increasing further to C$5 to C$6/MM Btu in 2015/16, several players in the WCSB have started "juggling" their portfolios, Leach said, noting current gas prices in the province is some C$3.09/MM Btu.
"The industry is going through a strategic shift that was long overdue. Earlier, producer focus was on beefing up oil sands assets and that accounted for over 80% of the total capital deployment in Western Canada," Leach said without giving any figures.
"But that's changing and we will see the return of capital to the WCSB. Given that the US is unlikely to be a prime consumer of WCSB output, producers in the basin will have to position themselves as suppliers to either Asia through LNG projects in the West Coast, or to oil sands producers in northern Alberta," Leach said.
Besides a higher gas price forecast, Leach said, the benefits of driving down costs by utilizing the multi-stage fracturing process to drill horizontal wells will also be a factor that will bring about resurgence in Western Canada.
Leach did not indicate any figures, but Gerry Goobie, a principal with Gas Processing Management, said Monday drilling costs are indicating signs of a 10% decrease in the WCSB depending on locations.
Costs vary from C$8 million/well to C$10 million/well in the Duvernay and Montney areas to as high as C$14.5 million/well at Horn River, Goobie said.
"There is no doubt companies are positioning themselves for better times and rationalizing their asset portfolios," Leach said.
