Marketing matters for natural gas producers

Even neighbours get different prices, sometimes a lot different

Analysts often err in their valuation of energy companies by comparing expected cash flows based on a uniform set of commodity price forecasts, sometimes called “strip” pricing. Those comparisons are useful as far as they go, but in the case of natural gas there are wide differences between realized prices by producer largely a reflection of differing marketing approaches. Here is a chart of Q2 2023 actual realized prices for four prominent Canadian natural gas suppliers.

Each of these producers is primarily a natural gas supplier, but their respective revenue from liquids is a significant differentiator and their realized natural gas prices ranges from a low of $2.67 per Mcf in the case of Birchcliff to a high of $5.89 per Mcf in the case of ARC Resources, a differnence of more than 100%. Even neighbours Peyto and Birchcliff have significantly different realized prices - Peyto realizing $3.13 per Mcf and Birchcliff $2.67 per Mcf.

Differences in pricing in the cases of oil, condensate or NGL are also significant, as much as 5% to 10%. Since price is the major determinant of economic outcomes for oil & gas producers, investors need to pay attention to the differing markets and Hubs served in valuing the stocks of each company.

The side by side comparison of Peyto and Birchcliff is telling. Peyto realized a better prices for natural gas than Birchcliiff and a better price for NGL, but the mix of gas and liquids produces a higher price per BOE for Birchcliff, a result of not only a higher liquids content but also an almost 8% higher price realization for condensate. ARC’s higher condensate mix sees a realized price per BOE almost 70% higher than rival Tourmaline although both operators produce in close proximity to one another.

Details matter. Investment errors arise when investors simply don’t do their own due diligence, relying instead on sell-side analysts some of whom do a great job and others a superficial one.

In my opinion, all four of these producers are solid investments and all should prosper in any environment where commodity prices are firm enough to allow profitable operations. ARC has some of the best land positions and great marketing, but the benefit of those advantages is squandered (at least in recent years) by ill-conceived “hedging” which has cost the company billions. Peyto and Tourmaline manage risk well and have low cost operations. Birchcliff is low cost and unhedged except for “basis” hedges which effectively diversify markets with a higher exposure to the U.S. Gulf Coast.

I own Peyto and Birchcliff shares, sold all of ARX.TO for a gain of about $300,000 over a year ago, and have traded in and out of TOU.TO profitably now and then but like the smaller entities since they have more to gain per share from higher prices and pay out surplus cash in dividends which I strongly prefer to stock repurchases. In 2020 I opened my position in Peyto at $1.04 and Birchcliff at $0.88 and have no intention of selling either stock any time soon.