Supply costs for oil & gas are vital inputs for energy investors decisions

Due diligence requires more than cash flow multiples

The Alberta Energy Regulator publishes the estimated supply cost of crude oil by basin. Here are recent data. The costs range from as low as $23.09 in the Viking formation to as high as $70.45 at Rock Creek.

Companies active the Cardium are Bonterra Energy and Obsidian Energy and they have demonstrated good economics. The low cost production from the Montney is beneficial to Spartan Delta as an example. It matters what lands each company drills and the differences are material to outcomes.

Natural gas supply costs also vary by region and range from a low of $1.19 per gigajoule to a high of $6.10 per gigajoule. It matters where each company operates and which basins they drill. Even within basins, it matters - Montney output in PSAC 7 at $1.19 per gigajoule compares to PSAC 2 at $4.20 per gigajoule.

The Duvernay area gets a lot of ink for the high productivity of its wells, but investors often ignore the high costs of those wells and don’t “drill down” to gain an understanding of each company’s economics in each piece of their acreage. Note that single well costs can be prohibitive in some areas.

Peyto Exploration & Development (PEY.TO) has among the lowest supply costs in North America which is why the company remains profitable even when gas prices are in the tank. I expect to see natural gas prices in the $6.00 per mcf range in 2025 which, while a break even for the Duvernay play, is quite profitable for dry gas producers and those with significant liquids output. Here are some comparative data assuming $6.00 per mcf gas and liquids prices more or less at today’s levels.

At those prices, if realized, all Canadian natural gas producers will have very strong margins with low cost Peyto leading the pack.