A warm winter, sluggish demand and stubbornly high supply have sent the price of natural gas tumbling to its lowest point in a decade, putting small Canadian energy companies in peril and threatening the balance sheets of their bigger counterparts.
Natural gas dropped to $1.984 (U.S.) per million British thermal units by the end of Wednesday, marking the third day in a row that the price dipped to a fresh 10-year low. Supply is outpacing demand, even as some energy companies slow, or stop, production at some wells and shift their attention to more lucrative commodities like oil and butane.
As a consequence, energy companies without price hedges, joint venture partners, access to proposed export terminals on the West Coast, or projects other than natural gas, are doomed to have their balance sheets stretched. Access to credit is being chopped, investors are fleeing, and some experts say the natural gas prices could continue to plummet, putting further pressure on weak companies.
All of these factors mean cheaper prices for consumers, but producers will find it more difficult to turn a profit – potentially forcing them to shed workers and further shelve investment plans.
There is a flipside: As companies flounder, activity in North America's natural gas fields will eventually slow down. As production declines, prices will eventually rebound.
But experts warn that could take months.
The United States is burning an average of about 12 per cent less natural gas a day than usual, said Rob Lauzon, a senior portfolio manager and energy specialist at Middlefield Group. Consumption south of the border has dropped by about six billion cubic feet a day, he said.
Encana Corp. , North America's second-largest natural gas company, may be able to tough it out, Mr. Lauzon said. Its size, hedges, and joint venture partner, work in its favour – at least for now.
"I'm not saying they are going to skate through, but they do have some hedges in place," he said. "But if this continues for two or three years, all gas producers would be in trouble."
The Canadian giant, which admits it misjudged how low natural gas prices would fall, has about two billion cubic feet a day, or about 65 per cent of its expected 2012 natural gas production, hedged at an average New York Mercantile Exchange price of $5.80 (U.S.) per 1,000 cubic feet.
About 505 million cubic feet a day of Encana's planned 2013 natural gas production is hedged at an average Nymex price of $5.24 per 1,000 cubic feet, chief financial officer Sherri Brillon said a conference call in February, according to a transcript.
To further shield itself, Encana recently struck a multibillion-dollar joint venture partnership deal with Mitsubishi Corp., sold assets, renewed and extended its credit facilities, completed a debt offering, and continues to search for more partners.
"We are well positioned for the rest of the year," Ms. Brillon said. "But we recognize the price exposure we have in 2013, and as a result, we are accumulating cash from the announced transactions to fortify our balance sheet heading into 2013."
Mr. Lauzon, the portfolio manager in Calgary, said Peyto Exploration & Development Corp. is "mildly profitable" at today's natural gas prices, and Bonavista Energy Corp. can make a small amount of money on one of its plays. He also favours Progress Energy Resources Corp. because it has a big joint venture partner; Tourmaline Oil Corp.; and Painted Pony Petroleum Ltd. Middlefield owns shares in these companies, he said. But even though these companies are in a better position compared to competitors, they are still a drag for investors.
"They are still getting creamed," he said.
Cequence Energy Ltd., Fairborne Energy Ltd. and Chinook Energy Inc. are among the small players with higher costs, and are thus more likely to suffer, Mr. Lauzon said. Small companies with so-called dry gas are short on bargaining power with the banks, and investors are shying away.
"They are cutting their [capital expenditures]to try to live within their cash flow, but it is becoming very tough when there is no cash flow."
Sandy Edmonstone, head of National Bank Financial's energy investment banking team, said companies continue to produce gas despite losing money because the money they do pull in helps cover some of their fixed costs, such as running processing plants. Until the industry shuts down more wells, supply will continue to outpace demand and low prices will continue to rock the industry, he noted.