Oil prices may be languishing in the mid-$40 range but that has not stopped the mergers and acquisitions market from heating up in the already hot Montney formation; one of North America’s most geographically extensive oil and gas plays. The Montney formation currently underpins 30% of Canada’s gas production but this is not the sole reason behind it being the most actively drilled formation in Canada (by a wide margin, with approximately three times the number of rigs running as compared to the next most active plays).
While many natural gas and oil plays alike have been left uneconomic in today’s commodity environment, the Montney, and more specifically the liquids and condensate-rich Elmworth/Gold Creek corridor, continues to have robust economics today and has been attracting the eyes and the investment of major producers. The liquids-rich Montney is one of the few islands of positive economic yield in a very challenged market.
Why Condensate
Condensate is an extremely light oil that is used as diluent for oil sands production so that it can be shipped via pipelines. Currently condensate trades at a premium to WTI because of a serious supply demand imbalance in Canada. Peters and Co, an investment bank focused on Canadian Energy, estimates that current demand for condensate in Canada is approximately 350,000 barrels/day and Canadian condensate supply is around 150,000 bbls/d, leaving a 200,000 bbls/d gap which is being filled by the Permian and Eagleford in Texas at present. This supply demand imbalance is only going to get worse in the future with condensate demand in Canada expected to rise to 650,000 bbls/d by 2020, supporting this commodity’s premium pricing.
In addition to its use as diluent in pipelines, condensate is now being tested to enhance oil recovery from the Canadian oil sands with great success. This new demand will further support condensate’s pricing advantage going forward.
What Does This Mean?
Condensate’s pricing advantage drives robust economics which has put this commodity on the radar of every major, as they look to displace their uneconomic projects. The issue for these majors is that the condensate-rich resource is found in tightly bound corridors within the Montney, where there is little to no available acreage. This leaves one choice; acquire companies with holdings in these corridors. A process which has already begun.
On October 13, 2015, Kicking Horse Energy, which holds 21 sections in the condensate-rich Montney at East Kakwa, was offered a buy-out price of approximately $356 million ($293 market cap + $63 million in debt, representing a 50% premium) by Orlen Upstream Canada Ltd., a subsidiary of Poland’s state-controlled PKN Orlen S.A.T. Kicking Horse currently produces approximately 4,000 boe/d of condensate-rich gas. Kicking Horse’s stock jumped almost 45% in Toronto Stock Exchange trading after the news, sparking talk of other potential takeover targets in the Montney. And, according to PKN Orlen, Kicking Horse may not be the last stop.
Who are the Next Potential Takeover Candidates?
Two Small-Cap companies, Blackbird Energy Inc. and Leucrotta Exploration Inc. stand out as the next potential candidates, as they both hold large land positions in the condensate rich Montney while being tremendously undervalued.
Blackbird Energy Inc.
Blackbird Energy Inc. (“Blackbird”) is a potential takeover candidate for the majors as it has a contiguous 78 section (49,280 acre) land position in the highly condensate-rich corridor at Elmworth, located in northwest Alberta. The company has a large land base in the heart of one of the more liquid-rich Montney areas. Within 12 miles of Blackbird’s acreage, there have been over 74 Montney wells drilled successfully with no dry holes. The company’s condensate to gas ratios are amongst the highest in the Montney, ranging from 120 bbls/mmcf to over 350 bbls/mmcf. The Montney formation in the Elmworth area is approximately 660 feet thick (200 meter). Blackbird’s acreage has the potential for over 900 drilling locations across three distinct intervals in the Upper and Middle Montney. The lower Montney is also prospective, which would add a potential fourth interval.
Blackbird is a potential target due to its land position at Elmworth and also the adjacent industry leaders: Encana, Conoco, Apache, Shell, NuVista, Canadian Natural Resources Limited and Sinopec. Recent wells in the area have continued to confirm high condensate results. Encana’s 2-15 well, which is approximately 10 miles northwest of Blackbird’s acreage, produced over 500 bbls of condensate per mmcf of gas. The Encana 13-22 well (which is only 2 miles to the west of Blackbird’s acreage) produced approximately 350 bbls of condensate per mmcf of gas and Blackbird’s 5-26 well produced over 341 bbls of condensate per mmcf of gas.
With approximately $23 million in positive working capital and no debt prior to commencing its 2-20 drilling operations, Blackbird is pushing ahead with its project, having just finished drilling operations, and is getting ready to complete its upcoming 2-20 well which will de-risk 25 sections of Blackbird’s acreage and could lead to positive value shift.
Leucrotta Exploration Inc.
Leucrotta, targeting the Dawson Montney area in northeast British Columbia, has 172 net sections of land (110,080 acres). The company currently has 650 boe/d of production but has an additional 1,350 boe/d behind pipe. Though its production is less liquids-rich than Kicking Horse’s at 40-100 bbls/mmcf, Leucrotta has already shown the market its lands are desirable through the sale of 3 sections earlier this year to Tourmaline Oil Corp. for $81 million. This transaction left the company well capitalized with $93 million in working capital and no debt. The highlight is that Leucrotta sold a delineated 3 sections of land for a substantial amount of funds. As the company continues to delineate and develop their project, substantial value shift will likely occur.
In Conclusion
As condensate continues to drive economic returns in the Montney, the majors will only accelerate their plans to build, acquire and produce in these tightly bound corridors. Blackbird and Leucrotta both stand as potential takeover targets as they have built up large positions in the heart of the most economic corridors in Canada. It’s not a question of if the majors pounce on these two companies, but when.