CALGARY, Alberta (Reuters) - Shale gas producers are victims of their own success, at least in terms of the glut of the fuel they helped create.
Now, they may be forced to keep applying their technology to tap other, less gassy, energy opportunities for at least another year until prices start some kind of recovery.
It’s a strategic side trip, but a necessary one as gas prices stuck in a range of $4 to $5 per million British thermal unit push a lot of shale wells below break-even and crimp cash flows of companies such as Encana Corp (ECA.TO) and Talisman Energy Inc TLM.TO.
“It’s tough to see share-price accretion for most of the gas-weighted names,” said Macquarie Securities Canada analyst Chris Feltin, who sees perhaps another 12 months of weakness.
“We still have a preference for oil-weighted names as the visibility for higher oil prices seems to be improving supply and demand fundamentals globally.”
That’s no secret to shale players, who invested heavily in prolific prospects in British Columbia, Texas, Louisiana and Pennsylvania and in the multistage rock-fracturing technology that has allowed the gas to flood markets in increasing volumes.
Encana, for instance, has become so efficient at producing the stuff it has somewhat immodestly dubbed its operations “gas factories”. Now, it and its peers face a market at the end of their assembly lines that won’t pay the price to produce it.
Shares in Encana, whose business was built on shale gas, ended Friday’s Toronto Stock Exchange session at C$31.21, up 84 Canadian cents. That is down 13 percent in the past 12 months, compared with a 22 percent gain by the shares of its former oil unit, Cenovus Energy (CVE.TO), and a 9 percent increase in the S&P/TSX energy group. .SPTTEN
Today’s message? Give the people what they want. Right now they want oil, or at least wetter gas.
Investors used to clamor for pure plays, and the higher returns they generate during strong market conditions. That’s why Encana split off its oil sands operations a little more than a year ago. Diversification is now the watchword.
“We like those companies that are managing their portfolio on a risk-adjusted basis, as they’re going to generate the most value for the shareholders,” said Martin Pelletier, managing director and portfolio manager at TriVest Wealth Counsel Ltd.
“We do that with our investments on a company-by-company basis, so they should be doing the same thing managing their investments, their assets, which are oil and gas wells.”
Talisman chief executive John Manzoni has staked much of his company’s future on shale gas, and it has quickly become one of the top producers in the Marcellus shale of Pennsylvania and New York.
But, this week, investors were cheered when he said he was chopping dry gas spending this year by 35 percent and will concentrate on liquids-rich gas — the gas that can be used for such fuels as propane and butane — and oil.
One thing companies discovered to profitable effect is the horizontal drilling and rock fracturing — “fraccing” — developed for shale gas is applicable to unconventional oil, such as the Bakken plays in Saskatchewan and Pembina Cardium in Alberta.
That has been key as oil and gas prices have decoupled as their fundamentals diverged.
As Pelletier points out, gas production by the thousands of cubic feet is multiplied by a factor of six to calculate barrels of oil equivalent. On a price basis, that is now out of whack, with gas at $4.50 per mmBtu and oil above $91.50 a barrel.
All of this does not mean shale gas is dead, though. Just resting.
Short-term fundamentals, led by a surplus of inventory across the continent, point to weakness through 2011, said Martin King, an analyst with FirstEnergy Capital Corp.
Baker Hughes said on Friday that the number of rigs drilling for gas in the United States fell for a sixth straight week, which could lead to a slowdown in output.
In the meantime, shale gas players have created excitement for the longer-term returns from their holdings by hunting for partners with deep pockets from countries as diverse as China and South Africa, which often agree to pay a higher share of the development costs.
Encana’s stock surged this past week when investors speculated that the company could be close to such a deal.
“The resource owners are actually improving their economics, thus driving down the near-term supply costs for these resources by bringing in some of these joint venture partners,” Feltin said.
Editing by Rob Wilson and Jeffrey Hodgson