By Adam Currie — Exclusive to Oil Investing News

The North American Shift from Natural Gas to Oil

Natural gas prices are trading at ten-year lows on the back of a surge in supplies and increasingly efficient methods of extraction. While some analysts feel that the commodity is likely to rebound, not all companies are quite so optimistic, and a number of them are shifting their initiatives to liquid oil.

Unable to produce product at a profit, the lucky few companies with enough capital on hand are already leveraging oil and natural gas liquids, resulting in significant alterations to overall company strategies.

“You can’t keep losing money”

Speaking at the CIBC 2012 Energy Conference in mid-April, George Fink, CEO of Bonterra Energy Corp. (TSX:BNE) said, “[o]ur gas drilling locations are totally mothballed right now. You can’t keep losing money when you’re drilling, [and] $2 for natural gas is not sustainable when costs are closer to $5 or $6.”

At the same event, Perpetual Energy Inc. (TSX:PMT) announced that it has also moved away from gas in order for its balance sheet to be “substantially restored to health.”

“Our gas marketer is being kind of morbid these days; he wants [natural gas] prices to go as low as they possibly can to get this capitulation over with, [but] we have been waiting for that for the last two years and the price keeps going lower. That is why you are seeing all this diversification now,” said Cameron Sebastian, Vice President of finance at Perpetual.

The company’s strategy shift is one that has become all too common across the sector over the past two years. Shallow natural gas makes up less than a third of Perpetual’s current production, down from 100 percent in 2007. That shift has meant that production has now been replaced with more cost-effective oil projects, which the company grew from only 100 barrels per day (bpd) in 2010 to currently over 3,500 bpd.

Yet another example of a shift in asset development is oil and gas junior Sun River Energy (OTCBB:SNRV), which recently announced its plans for oil development in East Texas.

In a press release, Donal R. Schmidt, Jr., the company’s CEO and President, said, “[a]s the price of natural gas began to decline last summer we began to evaluate shifting our focus to oil.” In a letter to shareholders he added that, “[w]ith the price of crude over $100 per barrel and natural gas declining to decade low prices, the shift was the logical one for Sun River.”

Majors selling assets

In a move that might send shivers down the spines of natural gas investors, Encana Corp. (TSX:ECA), Canada’s largest gas producer, has been selling gas assets worth billions of dollars in a bid to shift more of its focus towards liquids.

While this shift might be feasible from a major producer’s perspective, it has created a sentiment of fear amongst some junior explorers and producers.

“Those kinds of options aren’t always available to the junior sector,” said Gary Leach, Executive Director of the Small Explorers and Producers Association of Canada in a recent market overview.

“The fact is you can’t turn yourself from a gas producer overnight to a crude oil producer, [and] if you are trying to get rid of assets that are natural gas weighted, the prices being paid are low and in many cases there may not be any real buyer interest.”

In a surging crude market, a shift away from gas to liquid oil was always going to be a natural progression for those able to make the transition. Overall natural gas production has been dipping in Canadian companies, which produced 5.9 percent less product in January 2012 than in January 2011, according to a report compiled by Statistics Canada. Crude oil production in Canada grew 8.4 percent over the same period.

Shift not only affecting producers

The shift from gas to crude has not only been evident on the production side. TransCanada Corp. (TSX:TRP) announced that it is “actively” pursuing a move to ship oil rather than natural gas along a key pipeline network as prices for Alberta gas plunge.

According to Russ Girling, the company’s CEO, Eastern Canadian refineries have enquired about the possibility of moving oil through the company’s Mainline network instead of natural gas.

Chad Friess, an analyst at UBS Securities, expects current natural gas customers, as well as TransCanada, to welcome the transformation, adding that if the project was to go ahead that he expects light oil to fill the line.

“It would free up [TransCanada’s] stranded capital in the natural gas Mainline, and solve a lot of the problem they are fighting with producers on over tolls,” he said, adding, “[i]f a portion of that rate base was transferred towards an oil pipeline, it would be very attractive for both. It is like a win-win situation.”

Oversupply and declining prices

Meanwhile, Halliburton Co. (NYSE:HAL), one of the world’s largest oil businesses, confirmed that it reached record revenue in North America as the energy industry shied from natural gas production and boosted oil field exploration.

The company, which aids producers in constructing oil and gas wells, pointed to “a significant rig-shift that is taking place in the U.S. between natural gas and oil.” The shift has resulted in oil field rigs rising by 12 percent to a 25-year high while natural gas rigs dipped by 17 percent.

In a conference call with analysts, CEO David J. Lesar stated that natural gas production for Halliburton is sliding due to oversupply and declining prices, which have been “dramatic and disruptive to operations.”

All in all it seems that the bull run of natural gas is indeed a thing of the past, and despite forecasts of a recovery in the longer term, natural gas ventures will be very much on the back burner in the near term.

 

Securities Disclosure: I, Adam Currie, hold no direct investment interest in any company mentioned in this article.