Disponible en anglais seulement Western Canadian natural gas producers expect to see an increase in demand in the latter half of the year on the back of a project coming online in months. The LNG Canada project is a significant liquified natural gas plant and pipeline emanating from Kitimat, British Columbia.   The facility will allow Western Canadian producers to reach global markets such as Asia, where there is significant demand for natural gas. This is one reason why BMO sees room for valuations to increase in the sector, particularly as supply gets incrementally tighter over the course of the year and into 2025. The positive outlook is a welcome change, but producers will still have to navigate a series of challenges that could constrain their output.   Understanding the market forces at play was the focus of the “Outlook for Western Canadian Gas” panel that I recently hosted in Toronto at the BMO Capital Markets CAPP Energy Symposium, featuring:  Jamie Heard, Vice President of Capital Markets, Tourmaline Oil Corp.  Chris Carlsen, President and CEO, Birchcliff Energy  Jean-Paul Lachance, President and CEO, Peyto Exploration & Development Corp.  Outlook for natural gas  “There’s certainly some pessimistic views on the summer gas price, which we’ll need to get through first,” said Birchcliff’s Chris Carlsen. However, he says the LNG Canada project and a potential increase in demand for power generation in Alberta are encouraging for the sector. With that pick-up still several months away, Birchcliff is deferring some of its capital spending to the second half of the year to ensure any new production can capitalize on higher demand.   Peyto’s Jean-Paul Lachance estimates that LNG Canada will represent 10% of Western Canadian gas once the facility comes on stream. “That’s material,” he said. “Anytime you can put up a market into tension like that, it’s going to be good for the market.” LNG Canada may not have an immediate impact on Peyto’s current output, but it will be constructive to the basin's egress capacity.   What’s more, the development of LNG Canada is important to Western Canadian producers, but other new LNG facilities in the U.S. and Canada can also affect this sector.   As important as it is for the sector to have a global footprint, Tourmaline’s Jamie Heard is also encouraged by the potential for higher demand in North America, with the growing use of heat pumps, electric vehicles and data servers. “In our view, I would agree, we will continue to see weak cash pricing both locally and in the U.S. firming through the summer, and then more rapidly in the fall,” he said.   Expanding LNG  In Canada, other liquified natural gas projects are also in the works. Rockies LNG, a partnership of Western Canadian natural gas producers looking to develop LNG export opportunities, can also change the landscape.   The way these LNG projects are being developed is noteworthy. In the case of Rockies LNG, the project leads have partnered with the Nisga'a Nation, which owns the traditional territory where the floating LNG facility will be located. Nisga’a Nation also has an ownership stake in the project, which is helping the project gain traction and reach new milestones.   “Our partners in Ksi Lisims have a pipeline that’s permitted all the way to the West Coast,” said Carlsen. The project already has an offtake agreement, and it’s working on others. “From a producer point of view, it’s the access to global markets that we’re really after for Canadian producers,” he said.   Constraints on supply  As much as natural gas producers want to get their products to market, there are limitations. As Carlsen explains, finding capacity on the TransCanada Pipelines can take up to four years due to the consultation periods, system modeling, and regulatory process. “All those have added up,” he said, noting that wait time is almost double what it was many years ago.   Finding skilled workers is another challenge that affects all energy produced in Western Canada, causing companies like Birchcliff to carefully pick which projects to develop.   Nevertheless, Birchcliff’s Chris Carlsen is looking forward to a second-half pick-up in energy demand this year. “We see some real positives in terms of the demand-pull that’s coming,” he said. 

Disponible en anglais seulement   Oil and gas companies have recently managed to court some interest from generalist investors, such as pension funds and broad-based mutual funds, and now face the challenge of increasing investment from this important source of capital.   Over the past year, generalist investors have taken an interest in the sector partly because crude oil has climbed more than 25% so far this year1, while many energy companies have cleaned up their balance sheets and are investing in growth. Also, many continue to increase shareholder value by buying back shares. Since January, the S&P/TSX Capped Energy Index is up about 24%.2   How can producers continue increasing interest among generalist investors? That’s what was discussed in the “Access to Capital” panel I moderated at the recent BMO Capital Markets CAPP Energy Symposium in Toronto. The panel featured:  Rob Broen, President and CEO Athabasca Oil  Jason Jaskela, President, CEO and Director, Headwater Exploration  Steve Loukas, President and CEO, Obsidian Energy   Brian Schmidt, President and CEO, Tamarack Valley Energy  It’s still the early days when it comes to generalists moving into the energy space, said Athabasca’s Rob Broen, but investors are looking for companies that provide competitive returns, durability through commodity cycles, and can scale. With a clean balance sheet, plenty of cash, a large reserve base and good trading liquidity, Broen said Athabasca is in a good position to give investors what they’re looking for. Headwater’s Jason Jaskela said generalists are starting to move down cap and invest in companies with long-duration assets. Strong balance sheets are critical, too. “People want to see sustainable resources for a long period of time,” he said. “Those organizations are starting to see multiple expansions, and hopefully that continues.” It also helps to be in the S&P/TSX Energy Index, added Obsidian’s Steve Loukas, whose company, among many other smaller producers, is not yet included. He’s seeing interest from high-net-worth family offices, but “there’s a line in the sand that’s been drawn, and you need to be indexed.” A multi-strategy approach   For companies to continue attracting capital, they’ll need to take a multi-prong approach to increase value, noted the panelists. One common strategy to boost value is through share buybacks. Athabasca, for instance, is allocating 100% of its free cash flow to share repurchases. In 2023 alone, it bought back 58 million shares. “Based on today’s price, that was a good investment,” said Broen. “We’re in the market every day through an automatic repurchase plan, and through those buybacks, you get compounded cash flow per share growth. That’s a formula that’s been working.” While Loukas’ company has also bought back shares, he’s wary of only relying on repurchases. “If you’re operating at a high level and you buy back new shares, are you raising the point that it’s not as attractive on a relative basis relative to some of your other opportunities?” Growing production, improving cash flows, and repurchasing shares at accretive prices “is a powerful combination when things go your way, and they certainly are right now,” he said. Growing interest from U.S. investors   Some panelists noted that they’re seeing more interest from U.S. investors, with Tamarack’s Brian Schmidt pointing out that some of the biggest generalist investors in Canada – Canadian pension plans – continue to move away from the sector. “We used to be about 45% owned by Canadian pensions, and that’s gone down to about 7%,” he said. For him, the big question is how to replace that capital, and so far, it’s by attracting U.S. investors. They’re interested in buying assets that have tier-one inventory and low decline rates, he explained. “That’s resonating with U.S. investors, and it’s where we’ve had the biggest impact over the last, say, six months,” he said. Although, the pendulum may be swinging back when it comes to Canadian investors, as many have a solid understanding of the oil and gas sector. The energy sector’s significant progress around emission reduction is something investors may also want to pay closer attention to. As Lisa Baiton, CAPP’s President & CEO said in her opening remarks to the symposium, the conventional oil and gas sector has grown production while reducing emssions over the past decade. Many operations, however, don’t bring up their progress enough. “When the industry speaks about their investments and progress on emissions, they don’t call it out because it’s just part of their day-to-day business,” she said. More focus on performance   Going forward, companies should expect more scrutiny from investors, especially around performance. Broen said he’s noticed people asking more questions about asset performance and operational results, where they used to focus almost solely on the balance sheet. “The meetings are much, much deeper on the quality and predictability of the asset base in terms of performance, and investors are more knowledgeable about what we have,” he said. Investors now want to know how companies can “turn one dollar into three,” noted Jaskela. A couple of years ago, people wanted companies to give as much money as they could back to shareholders. Now they want to know how much more can the business grow and what the opportunity set looks like. It's a process  While attention from generalists is increasing, it will still take some time before more oil companies and investors start thinking beyond dividend yields and buybacks, added Loukas. For too long, people thought you could engineer a big multiple with a large dividend, and then many clamored for buybacks. But Loukas pointed out that conversations have changed since Obsidian announced a three-year growth plan last September.   “Some investors embraced those plans because they recognize that the returns are more attractive than dividends, while there’s an upper bound on how many shares you can buy. It’s taken time, though,” he said. “The return of some of our development programs has validated the decisions we’ve made, but it’s a process.”    1 https://www.cnbc.com/quotes/@CL.1   2 https://www.spglobal.com/spdji/en/indices/equity/sp-tsx-capped-energy/#overview

Disponible en anglais seulement Ian Lyngen, Ben Jeffery, and Vail Hartman bring you their thoughts on the U.S. Rates market for the upcoming week of April 22nd, 2024, and respond to questions submitted by listeners and clients. Follow us on Apple Podcasts, Stitcher and Spotify or your preferred podcast provider. About Macro Horizons BMO Strategists discuss the week ahead in the U.S. rates market delivering relevant and insightful commentary to help investors navigate the ever-changing global market landscape. Podcast Disclaimer

Disponible en anglais seulement This week Robert Kavcic, a Senior Economist from the BMO Economics team, Fred Nastos, Head of Government Spread Trading and Adam Whitlam from our Canada institutional sales desk, join me to share their thoughts on the provincial & federal budgets, the potential impact of policy measures on markets, how the Bank of Canada outlook changes, and their latest market insights. As always, all feedback is welcome.   Transcript will be posted shortly. Follow us on Apple Podcasts and Spotify or your preferred podcast provider. About Views from the North BMO’s Canadian Rates Strategist, Ben Reitzes hosts roundtable discussions offering perspectives from strategy, sales and trading on the Canadian rates market and the macroeconomy.  Podcast Disclaimer