Energy Sector Update for 12/18/2015: VII.TO, NVA.TO, TOU.TO, ARX.TO
Credit Suisse writes that as far as gas assets go in Western Canada, it is largely understood that continuous innovation and efficiency gains in unconventional shale/tight gas have driven down the supply costs (price). This continuous improvement is often referred to as rate of change. Companies that are unable to maintain a positive rate of change may find themselves falling behind its competitors. Aside from company and play specifics, fiscal and royalty frameworks have a role to play.
Based on Credit Suisse's cross-border analysis, it appears that the more vulnerable dry gas assets in areas with greatest infrastructure and basis differential risks benefit the most from the current fiscal framework in terms of allowing for a slower rate of change to keep pace with U.S. competitors.
Results from the ongoing royalty review in Alberta are currently expected to be announced in January 2016. Credit Suisse is not anticipating major changes, but more along the lines of simplification and possibly a broad alignment with the Alberta government's climate change agenda.
At a time of increasing demand uncertainty, volatile and low oil prices , and an oversupplied LNG market, the brokerage believes it unlikely that a FID on either Shell's Canada LNG proposal or Petronas's Pacific Northwest LNG terminal may come in 2016. "Instead, we believe 2016 will be a year in which buyers posture for lower prices and sellers posture for economic confidence in return, while not many new supply projects will be sanctioned."
Preferred stocks in the Western Canadian natural gas space include Seven Generations (OP, TP C$19.50), NuVista Energy (OP, TP C$5.50), Tourmaline Oil (OP, TP C$31.50) and ARC Resources (OP, TP C$24.00).
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