Varcoe: Canada’s biggest natural gas producer expects prices to rally next year, secures $1.3B takeover

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As western Canadian natural gas markets continue to be battered this summer, Tourmaline Oil Corp. has made a counter-cyclical move and acquired Crew Energy Inc. in a $1.3-billion deal.

Investors welcomed the announcement as Tourmaline seized an opportunity to buy more properties in the prolific Montney formation in British Columbia.

Observers say it’s also a signal that the mercurial fortunes of natural gas producers in Canada are expected to improve in the coming months after a prolonged price slump facing the commodity.

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“Generally, the right time (for deals) is at the bottom of cycles, and we think we are near, or at, or past the bottom in the natural gas pricing cycle,” Tourmaline CEO Mike Rose said in an interview Monday.

“The future looks bright for Canadian and North American gas with the doubling of the LNG capacity in the U.S. and the startup of Canadian LNG on the West Coast.”

Already the country’s largest natural gas producer, Tourmaline announced the friendly takeover on Monday, agreeing to an all-stock deal that valued Crew shares at about $6.69 each.

It represents a 72 per cent premium over the junior producer’s closing share price on Friday, which had recently closed near its 52-week low.

“This is one of the largest takeout premiums we’ve seen in a long time in Canadian oil and gas,” analyst Jeremy McCrea of BMO Capital Markets said in an email.

“There are fewer and fewer options for LNG operators to secure ‘cheap’ gas molecules, and as we start to see many of these LNG projects come on stream over the next decade, B.C. natural gas production will need to be meaningfully higher.”

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Calgary-based Crew produced 29,000 barrels of oil equivalent (boe) per day during the second quarter, and some of its assets in the Montney in northeast B.C. are adjacent to Tourmaline’s properties.

The smaller gas-weighted company said it initiated an internal strategic review in May. In a news release, it noted Tourmaline “has the scale and financial capacity” to expedite development of Crew’s growth opportunities.

“We think the Crew production base, over time, (that) we can double it or more,” Rose said.

“But we won’t do that until we see the best possible gas pricing environment.”

Tourmaline has grown organically since being founded in 2008, but has also been one of the most acquisitive companies in the Canadian energy sector. It took over Bonavista Energy Corp. in October for $1.45 billion, snapped up Black Swan Energy in 2021 for $1.1 billion and bought Jupiter Resources for $630 million four years ago.

Like many gas producers, it has slowed some growth-oriented spending this year as prices for the commodity have been in a slump.

In March, Tourmaline announced it would prune its forecast capital budget by $220 million to $2.13 billion this year because of weak prices.

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However, with the anticipated startup of the massive LNG Canada development next year, increased U.S. Gulf Coast LNG exports, and the need for more gas to fuel electricity generation — including for new data centres in North America — Rose is bullish on next year’s outlook.

“We think pricing is going to be better in 2025. (To) be honest, we can’t pick whether it’s first half or second half, but it’s got the right drivers to increase natural gas prices here over the next 12 months,” he added.

“The reality with Tourmaline is . . . we’re making money at the bottom of the cycle here.”

On the Toronto Stock Exchange, Crew’s stock price soared 76 per cent on Monday to close at $6.88. Tourmaline shares jumped four per cent to $60.73.

Crew was spun out of Baytex Energy in 2003, with initial production of about 1,500 boe per day, growing to almost 30,000 boe a day in the April-to-June period.

The market wasn’t recognizing what Crew’s assets were worth, and the Tourmaline deal will still allow investors to benefit from the Montney properties growing production as prices rise, said Dave Szybunka, senior portfolio manager and managing director of the energy team at Canoe Financial, which owns shares in both companies.

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“We think this is a good deal for both groups,” he said.

Gas prices have been depressed in Canada and the U.S. this year. On Friday, AECO gas in Alberta traded at US 62 cents per thousand cubic feet (mcf), while benchmark U.S. prices closed at US$2.17 per million British thermal units (mmBTU), according to data by ATB Capital Markets.

Gas storage levels are well above the five-year average in Canada, weighing on the market, say analysts.

A return to normal winter weather throughout North America could boost demand and help improve the fortunes for gas producers.

Meanwhile, the LNG Canada development will export about 1.8 billion cubic feet (bcf) per day of gas to customers in Asia and is expected to begin operating next year.

ATB Capital Markets is forecasting U.S. gas prices will average US$3.50 per mmBTU next year, while AECO prices will average C$3.25 per mcf.

“There is optimism and enthusiasm for gas,” said analyst Patrick O’Rourke of ATB Capital Markets.

Ian Archer, an expert in North American gas markets at S&P Global Commodity Insights, said the market is oversupplied due to warmer-than-normal weather last winter and strong production levels.

Archer said he’s not as bullish as some on the speed of the market turnaround tied to LNG Canada, but expects gas demand to grow in 2025.

“You have a combination of high supply, elevated storage inventories and fairly modest summer demand. That’s really knocking AECO to the curb right now,” Archer said.

“We see prices strengthening throughout 2025 . . . there are better times ahead.”

Chris Varcoe is a Calgary Herald columnist.

cvarcoe@postmedia.com

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