AECO Basis Erodes Further; a Look at AECO Exposure by E&P
Market Hasn't Differentiated Between those with/without Exposure
TD Investment Conclusion
Natural gas prices at the Henry Hub (HH) have rallied to levels not seen in nearly 15 years. This has been driven by growing LNG exports, strong global gas prices, producer restraint, egress limitations on new additions, strong weather-related demand, and low inventory levels.
Canadian gas prices at AECO (and Station 2) have not kept pace. Currently, AECO is trading at only ~C$0.90/mmbtu (~US$0.70/mmbtu), which is ~US$8.70/mmbtu below HH. Since June 1, the spot price at the HH is up 11%, while spot AECO has eroded 87%. Given demand-driven regional strength at the HH, we would expect some widening of AECO basis; however, we believe this is being further exacerbated by Canadian gas production growth, a variety of outages on the NGTL and Enbridge systems through fall, and potential delays associated with planned capacity expansions.
From an equities perspective, this dynamic results in spot AECO prices trending well below consensus expectations (even before yesterday's sharp decline). Specifically, we believe that the sell side is basing H2/22 CF estimates on an average AECO price of $4.63/mmbtu. Should AECO basis stay wide, we believe a handful of producers may not realize the CF fully baked into consensus expectations. Fortunately, for Canadian gas producers, most have materially diversified the pricing points at which their gas is sold — with the average gas-weighted producer having only approximately 25% of its gas exposed to spot AECO/Station 2 pricing in H2/22E.
In this note, we look at the relative exposure that each of the Canadian gas-weighted producers has to spot AECO through H2/22 and the relative sensitivity of H2/22E CF per $1.00/mmbtu change in AECO basis.
Key Takeaways
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Minimal Exposure for Most: Despite combined gas production of ~5.7 Bcf/d, the independent gas producers in our coverage group market only ~3 Bcf/d of those volumes at AECO/Station 2. Meanwhile, through a combination of fixed pricing and basis contracts, the amount of gas exposed to spot AECO and basis of this group is only ~1.4 Bcf/d (~25% of production).
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Who is Least Exposed to AECO? Within our Canadian natural gas coverage universe, NuVista (NVA-T), ARX (ARX-T), and Birchcliff (BIR-T) have the least exposure to spot AECO in H2/22E.
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Who Has the Most Exposure to AECO? Those with the largest proportion of production exposed to spot AECO and the most CF sensitivity to a widening of AECO basis in H2/22E include Peyto (PEY-T), Spartan Delta (SDE-T), and Kelt (KEL-T).