The outlook for Canadian natural gas

The combination of disrupted production, increasing demand and low inventory will lead to strong natural gas prices this winter, says CIBC Asset Management’s Brian See.

Various events are contributing to falling production levels, said See, vice-president of equities, energy, during a late-October interview.

One is the recent explosion of an Enbridge-owned natural gas pipeline in B.C. Repairs were forecast to be completed this month, but the pipeline will only run at 80% of normal operating capacity, according to reports.

In the meantime, affected companies include Calgary-based natural gas producer Painted Pony Energy Ltd., which said in early November that its production in the fourth quarter will drop 20% due to reduced shipping capacity.

FortisBC has also warned about the shortage of natural gas this winter. The natural gas transmission company is looking to the spot market to import compressed and liquified natural gas, The Canadian Press reported earlier this month.

At the same time, See expects increasing demand—particularly in Alberta—from the oilsands and other industries. Alberta’s demand for natural gas was an estimated 52.3% of the province’s production in 2017, mainly because of demand from the oilsands and electricity generation sectors, the Alberta Energy Regulator reported in July. That demand is expected to grow annually by 2% on average over the next 10 years, it added.

A third factor, which could exacerbate the fact that demand is already increasing even as production falls, is the all-time low inventory levels of natural gas, said See, who co-manages the CIBC Energy Fund. This “under-appreciated” reality, he added, means there’s only a small amount of stored natural gas available for the winter heating season.

Overall, See expects the combination of these factors “will lead to robust and strong prices into the winter season,” with the potential for spikes like the one last week in the U.S. and Canada following early cold weather and rallying futures markets.

“Of course, that’s highly dependent on weather as well because weather drives a lot of natural gas heating demand,” he said.

Over the next few years, however, there could be price challenges. While production growth is falling, See said, it’s “still fairly robust in certain cases,” and natural gas supply will constantly come onto the market as a by-product from the production of other fuels.

“While we see some demand on the horizon here in terms of industrial and oilsands growth, the overall demand is fairly slow in relation to the production that’s growing,” he said.

LNG projects

Investors can’t consider the long-term outlook for natural gas without looking at the development of liquid natural gas (LNG) projects such as the LNG terminal in Kitimat, B.C., See said.

LNG Canada, the $40-billion LNG export terminal that’s backed by a consortium of oil and gas companies led by Royal Dutch Shell, received final approval in early October. After years of delays, the B.C. government has forecast that the terminal could add $22 billion in revenue to the province’s economy over 40 years.

The project is significant because it’s going to transport approximately 1.8 billion cubic feet per day from Western Canada to growing markets in Asia, specifically China, Japan and South Korea, See said. This will create “pretty strong” demand in relation to the overall 14 bcf per day Canadian gas market.

The B.C. labour market will also see some upside, See said. The project, which includes a pipeline from Dawson Creek, B.C. to the coastal terminal in Kitimat, is expected to cost $40 billion.

The benefits for gas demand and the broader Western Canadian economy will be longer-term, See said, likely around 2022 or 2023 as the project will take years to build.

Another company, Woodfibre LNG, plans to start building a $1.6-billion LNG project north of Vancouver in the first quarter 2019, and start shipping natural gas by 2023.

Portfolio exposure

For the near term, See said he has “some gas exposure in the portfolio because we are constructive on the winter gas trade.” One of the companies he named was Calgary-based oil and gas producer Arc Resources.

“We find [the] valuation is extremely attractive: the company has high-quality assets, an extremely strong balance sheet and very able management to continue to produce gas assets at an economic rate of return,” See said. He added the company is in a good position for any long-term LNG opportunities.

Arc Resources reported a profit of $45.1 million for the third quarter. The company also announced a record quarterly production for natural gas, and completed two infrastructure projects including the expansion of a gas processing plant.

However, See is still cautious on gas overall. “Our gas weight is underweight relative to market expectations because of the longer-term structural issues,” he said.

This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.