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A Profitable “Option” On Canada’s Shale Boom! PDF Print E-mail
Written by Matt Insley - The Daily Reckoning   
Wednesday, 06 March 2013 11:23

220px-Athabasca Oil Sands mapThe rest of the world is out of luck.

While the U.S. basks in its shale bonanza – bringing cheap energy and manufacturing back to American cities coast to coast – the rest of the world is sitting idly by.

China? Nope. Poland and the rest of Europe? Sorry, no. Argentina? Uh-uh.

Here on the Cinco de Marcho 2013, no one — world over — has the capability to produce the unforeseen bonanza like we’ve enjoyed in the United States.

That is, except for Canada…

Canada is the only other legitimate player in the world shale market. And by the looks of the full frontal prosperity that’s hitting the U.S., I’d wager a solid bet that our neighbors to the north have some great days ahead of them. So too, do investors.

But first, for the naysayers out there — whether you still don’t believe in the longevity of shale oil and gas or you think there is “so much” oil and gas that the market will flush itself down the toilet – let me remind you that the U.S. is the prime example of how this trend will play itself out.

Here we are 3-5 years since major shale production began in the U.S. – and the shale train is still chugging along. Economic, producible energy, in an area that allows efficient development will thrive.

And when the energy starts flowing through pipelines and processing plants, demand will sprout up to support prices. You give me inexpensive oil; I give you consumers that drive more. You give me inexpensive natural gas; I give you manufacturers that producer more.

Okay, hopefully by now the naysayers have left the building.

That said, let’s take a look at two ways to play the prolific shale deposits in Western Canada – the Montney and the Duvernay. Indeed, much like the U.S. offered us a lot of profit opportunities, there is also some low-hanging Canadian fruit.

Two Ways To Play Canadian Shale

There are two horses I’d bet on in this race. The first is a pipeline player that could provide key infrastructure for Alberta’s crude oil…

Kinder Morgan Energy Partners LP (KMP) is a huge player in the North American pipeline business. And more recently they’ve started making moves to alleviate some of the trapped oil in Alberta.

As I type, Kinder Morgan is moving forward with regulatory steps for an expansion to its TransMountain pipeline. And although this isn’t the media darling, Keystone XL, the story could be very profitable.

Currently the pipeline moves 300k barrels per day (bpd) from Edmonton, Alberta to Vancouver, British Columbia. This fully-oil pipeline is a huge asset for Kinder Morgan, moving bottled-up oil from Alberta’s oil sands towards big-city demand in Vancouver. Plus, as an added bonus the pipeline transports crude further south to Washington State – home to a 600bpd refinery.

The expansion to the existing pipeline will add an extra 590kbpd — nearly tripling transport capacity to 890kbpd — and is expected to be completed by 2017. Along with providing growth for oil sands this pipeline will play a crucial role for shale oil expansion from the Duvernay. Indeed, this is the type of pipeline that Alberta needs to maintain its energy growth – and the way I see it, it’s only a matter of time before this expansion gains approval – after all, it’s much easier to approve an expansion than it is to grant a whole new pipeline proposal.

Once approved, this expansion will provide key infrastructure to a multi-decade boom in Alberta (just think about that rainbow-colored chart from yesterday.) Or said another way, it’ll pay off for shareholders, for decades.

All said, Kinder Morgan is a big player in North American infrastructure – crude oil, natural gas, petroleum products, natural gas liquids (NGLs) and CO2 – and today they look to be adding to their North American portfolio with a big development up north. It’s moves like this that will allow Kinder Morgan Partners to pay its dividend (currently 6%) for years to come.

The second player I’d urge you look at up north is Talisman Energy (TLM.)

Talisman is a producer and operator in North American shale – the company has acreage in Pennsylvania’s Marcellus shale, the Eagle Ford in Texas, and emerging plays in Western Canada. Of note, Talisman is a top-ten acreage holder in the Montney – along with holdings in the Duvernay and Edison formations.

Talisman is in a good position here. They have production coming from the Marcellus and Eagle Ford – plus, along with that production they’ve also gained a heckuva lot of know-how in the shale space.

Going forward, Talisman will be able to leverage that know-how and eventually ramp up production in its Western Canadian assets.

When? Well I’m glad you asked…

It all gets back to a profitable little secret that I heard in Calgary last week. Let me explain.

With oil and gas production, operators like Talisman have to buy lease agreements. In the U.S. these lease agreements are very competitive – and contractually grant the land-owners a lot of benefits. In some cases it makes it very difficult for a producer to make smart, long-term decisions. After all, if your lease agreement says you MUST drill a well every “XX” months, or produce “XX” amount of product, you can quickly paint yourself into an unprofitable corner.

For an example, look at Chesapeake Energy. The company bit off more than it could chew when it comes to leasing agreements. Said simply, it bet on higher gas prices and infinite drilling – and it bet wrong.

Today, companies like Talisman are getting a lot smarter with their lease agreements – especially in Canada. According to Mike Wood, VP of Talisman’s Canada Shale Division, Talisman has the ability to hold acreage for 10-15 years with one rig running.

This is very unique and potentially very-profitable position to be in. For the cost of a handful of rigs, Talisman can keep poking around in Western Canada and maximize its gameplan. Then, when logistics and prices are beneficial (sooner than you think, I’d bet) Talisman can rev up production.

In essence, Talisman is your “option” play for Canadian shale. In other words, Talisman is already a strong producer in North America, but today with their solid acreage position in Canada’s Montney shale, they could enjoy a huge run-up if any number of dominos fall their way.

A rise in gas prices…continued build-out of pipelines…a jump in demand for Canadian natural gas…unlocking the key to lowered costs in Canadian shale – any of these factors could put Talisman in a winning position. And with favorable lease agreements Talisman can be patient.

But that’s not all I’m banking on for this shale standout. The other great part about Talisman’s story is that you can tell they are all about cost savings. Something that you and I know is crucial to profiting from shale shares.

Leveraging their know-how from U.S. shale plays will prove a vital key for cost savings techniques up north. And in some cases the cost savings are even better than their U.S. counterparts.

The Montney, according to Wood, is like “4 shale plays stacked on top of each other.” This fact alone lends itself to massive cost savings by drilling as many as 24 wells on a single pad site. So instead of having to pack up shop and move your rig to another drilling location Talisman can remain on site and add to production while lowering costs.

Along with multi-pad drilling, Talisman is utilizing other cost savings techniques like natural gas powered rigs, insourced sand supply and other out-of-the-box cost savings – all told drilling costs are down 29% since 2011.

Oh, and did I mention the company has a farm-in deal with Sasol to help pay for drilling operations? (Much like it’s Eagle Ford deal with Statoil.)

All said, the company looks to be a relatively low-risk “option” on Canadian shale.

Truly, it’s only a matter of time before Canadian shale starts to really take off. Companies like Kinder Morgan and Talisman are in a good spot if you ask me.

Keep your boots muddy,

Matt Insley

Original article posted on Daily Resource Hunter

 

Matt Insley

The Managing Editor of the Daily Resource Hunter, Matt is the Agora Financial in-house specialist on commodities and natural resources.  He holds a degree from the University of Maryland with a double major in Business and Environmental Economics.  Although always familiar with the financial markets, his main area of expertise stems from his background in the Agricultural and Natural Resources (AGNR) department.  Over the past years he’s stayed well ahead of the curve with forward thinking ideas in both resource stocks and hard commodities. Insley's commentary has been featured by MarketWatch.

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