Post by
PabloLafortune on Apr 01, 2024 12:50pm
Oil prone (40%) vs natural gas prone (10-15% oil)
Even though Kelt breaks down their business into 3 divisions - Oak, Wembley, Pouce Coupe - from a commodity point of view, it makes more sense to break it down into oil prone vs natural gas prone.
What Kelt is saying about maintaining the mix (30-32% oil and condensate, 8% NGLs and 60-62% natural gas) going forward is actually an amalgam of two types of assets. In my view, BOEPD = passenger vehicles, oil = light truck sales and natural gas is cars. So while you might want to have both sides grow the same, its clear that one is very profitable while the other is not so much.
Oil Prone is Wembley, the 3 Charlie Lake mini plays, and Pouce Coupe/Progress oil prone.
Kelt's oil prone plays are all afaik natural gas processing capacity constrained (cannot flare in Canada) - even after adding 25MMcf of plant capacity in Q4 @ Wembley, they still have wells that are shut in. By the time the new 3rd party plant that Kelt signed up for 50MMcf comes on-line in Q4, highly likely they will still have wells that are shut in.
As a result, they arent' drilling as many oil prone wells as they could. At Wembley, they are drilling a lot more wells this year - 16.. Meanwhile, they have 188 locations booked so they have 12 years of booked inventory. They have also identified a further 682 unbooked locations so in total they potentially have something like 50 years of drilling inventory.
Most importantly, oil prone is very profitable and price of oil (knock on wood) is not as volatile as natural gas. @40,000 boepd from oil prone plays - a level they will reach sometime in 2025 I believe - its something like $500MM of annual cashflow based on $83 WTI and $3.45 HH.
Natural gas prone is Oak, Pouce Coupe West and Other. Pouce Coupe West is a small sliver of prolific natural gas. Due to much lower oil % and low natgas prices, natural gas prone is nowhere near as profitable as oil.
And in Natural gas, most peers in Canada own their own plant and they have active natural gas marketing and hedging. When Mike Rose of Tourmaline on a BNN call said they have to be good at everything, he was right of course (as he usually is). But what made him say that? It was because of how important marketing and hedging had become.
Historically, excelling at marketing and hedging for oil prone producers was not a focus - it was nice to have but not necessary for even the largest producers such as Pioneer Resources (this was discussed by Scott Sheffield). But now no more - they can see that if they do a good job, they can add a lot of profit to the bottom line.
But for natural gas prone producers, its absolutely necessary. EQT and others would not survive at current natural gas prices without hedges in place. And they all put a major emphasis now (see their presentations) on being full participants in LNG.
As an aside, there is plenty of natural gas south of the border. Most producers are limiting their growth if not shrinking. Whereas the oil prone producers (Permian, Eagle Ford, Wililton) are all drilling as much as they can. Even then, its a struggle for the US to grow oil production. Many think the days of terminal decline for oil are coming soon. That is IMO the major factor causing oil prices to be high and natural gas prces to be low.
With respect to natural gas marketing and hedging, Kelt is operating the way Pioneer used to. Which is fine - though not ideal - for oil prone assets but its not really fine for natural gas prone plays. Because the profit strategy in this case can be summarized as hope for good natural gas prices.
Hope you enjoyed this narrative!!!