New Brunswick Elections: PC Minority Government

As of now, the Progressive Conservatives, lead by Blaine Higgs, were ahead with 22 elected representatives. New Brunswick Liberals followed with 21 seats. Majority is 25 of the 49 seats of the Assembly. Results are not official yet as some ridings were won by less than 10 votes.

Bryan Gallant, the leader of the NB Liberals, didn’t concede victory to the conservatives in his speech tonight. He wanted to speak with the Lieutenant Governor and other parties to try to form a government, even though the Liberals didn’t have the most seats.

On the contrary, Higgs said it was his own responsibility to convene a minority government.

The highest number wins.

Blaine Higgs, Leader of the Progressive Conservatives of New Brunswick.

Higgs was referring to his higher number of seats, despite losing the popular vote. The NB Liberals are claiming a moral victory as they hold a 6% lead in the popular vote.

The probable outcome is for Higgs to form a minority government. This, despite not a majority government, is a bullish breakthrough for Corridor.

Disclosure: I am long CDH. Not for republication on Seeking Alpha.

Corridor Resources: The Detailed Story

I still believe Corridor Resources is a cheap way to bet on the results of the New Brunswick elections tomorrow. However, no clear winner is emerging, despite waiting a month for a clearer picture on today’s elections. This option is cheap for a reason.

Nonetheless, the story of the company is interesting to know whether you want to speculate on the outcome of today’s elections or not. Indeed, Corridor represent an interesting opportunity and will be subject of an article no matter the election results today.

This is a recap of the history of Corridor, its New Brunswick operations, the fracking moratorium and finally the special market for natural gas in the Northeast.

History

Corridor is a micro company operating out of the Canadian Province of Nova Scotia. Corridor has a history of stranded assets. The company has had three assets in its recent past:

  • The Anticosti Island shale prospect in Quebec;
  • The Old Harry offshore prospect in the Gulf of Saint Lawrence, and finally;
  • Shale gas acreage in New Brunswick.

The Anticosti Island prospect benefited from strong support from the government at first, despite a indefinite moratorium on fracking for the rest of the Province of Quebec. This favorable environment all came crashing down after the 2015 Paris Climate Conference. Premier Couillard vehemently condemned the project when attending the conference. This was in December 2015.

The project then became a political nightmare. Still, preparatory work and exploratory drilling followed its course. The government stopped the operator just before the first fracking took place. The government announced a plan to abandon the project, following the compensation of the partners involved in the exploration of the island.

The Old Harry offshore structure was on Corridor’s radar for quite some time now. A drilling lease was first issued in 2011. The lease was expanded recently to 2021 for the drilling to drill a new exploratory well. Unfortunately, Corridor had to abandon exploratory work in there following disappointing results from the CSEM. There isn’t a future in the medium-term for the Old Harry prospect.

New Brunswick shale gas

The last asset on its book is the New Brunswick shale gas asset. Corridor currently earns all of its revenues through its natural gas operations, despite the asset being under a fracking moratorium since 2014.

Oil Gas Rights New Brunswick

Source: Potential Economic, Health and Environmental Impacts of Shale Gas Development, Volume 2

The New Brunswick Liberals imposed a moratorium on all fracking done in the province in 2014, after failing to meet their own set of conditions.

Moratorium

The NB Liberals first instituted the fracking moratorium just after the election, in December 18, 2014. Then, it was announced in early 2016 the moratorium would be extended indefinitely, until five key conditions, spelled out after the environmental evaluation, are met:

  • A social license in place;
  • Clear and credible information about the impacts of hydraulic fracturing on our health, environment and water, allowing us to develop country-leading regulatory regime with sufficient enforcement capabilities;
  • A plan that mitigates the impacts on our public infrastructure and that addresses issues such as waste water disposal;
  • A process in place to respect our obligations under the duty to consult with First Nations;
  • A mechanism in place to ensure that benefits are maximized for New Brunswickers, including the development of a proper royalty structure.

Source: New Brunswick Governement

Some interest groups are pushing to permit fracking again in New Brunswick. It could very well be a gold mine for the province: Natural gas prices are very high in the Maritimes and in the Northeastern US. Those markets are interlinked by the Maritimes and Northeast Pipeline.

Market

Maritimes And Northeast Pipeline

Source: Maritimes & Northeast Pipeline

The use of natural gas increased significantly in New Brunswick from 1999 to 2013, mainly because of the arrival of natural gas from Nova Scotia’s Sable Offshore Energy Project (SOEP) in 2000.

New Brunswick’s economy is now heavily linked to natural gas and will be for many years to come. Should prices remain competitive, natural gas demand is expected to keep growing, namely because of electricity production, and for industrial and commercial uses.

The local market is very inefficient because of a lack of takeaway capacity in the Northeastern US, coupled with growing demand, especially in the winter months, and shrinking supply. There isn’t enough natural gas to heat American homes and produce electricity at the same time. This leads to a substantial premium compared to Henry Hub prices.

AGT Pricing

Source: Corridor Resources, May 15, 2018

This huge mispricing in the market is, of course, a money making machine for Corridor. Operating netback was C$11/Mcf in Q1 2018, or an astonishing C$65/boe. The operating netback was substantially lower in Q1 2017, at C$34/boe.

The premium pricing in the winter is expected to persist in the long-term, or better for Corridor, increase. Indeed, offshore natural gas production is expected to decline substantially. SOEP decommissioning has begun in late 2017. Deep Panuke is having problem of its own, namely water leakage. Encana, the owner and operator, has already filed an application to start the early abandonment of the offshore field. Encana anticipates conducting decommissioning activities during the 2019-2021 timeframe.

Transportation costs from key US shale plays to New Brunswick is estimated at C$3.67 per MMBtu, excluding local delivery costs and the price of the commodity itself. As such, not only will the price Corridor receives will trade at a premium compared to Algonquin Citygates, but it will also pay less for shipping given the proximity of the McCully field to the demand centers in New Brunswick.

A pipeline project connecting Marcellus gas to the Northeast US and the Canadian Maritimes is currently landlocked in Massachusetts. Both senators from Massachusetts are vocally opposed to the project and called into question the FERC ruling on the necessity of the pipeline. Unless the Maritimes can source additional natural gas from the Marcellus, ironically being shale gas, the province will pay an even bigger premium for its gas.

In all, the substantial pricing advantage is expected to continue, no matter the election results.

Disclosure: I am long CDH. Not for republication on Seeking Alpha.

Portfolio Update: Escaping Volatility

I was out of Gear Energy, as you know, and MEG Energy. My timing was, for once, good. I took profits.

On the other hand my timing on Granite Oil wasn’t good.

GXO StockCharts.com August 19

Source: StockCharts.com

I sold Granite at a rock bottom price. It was frustrating as the stock was at C$3 per share a month ago. The stock continued falling last week. Granite could be an interesting buy in the future. For now it simply didn’t make sense to keep the stock.

I still think MEG is an interesting play on Canadian heavy oil, despite having sold half of my position. The stock showed some strength at the end of last week. There is a future for MEG shareholders, especially with an activist investor such as Highfields Capital.

I started to rebuild my position in Gear after the fall last week.

I also bought Corridor Resources. The New Brunswick election in September is coming in a month and it’s currently projected to be much more closer than what’s reflected in Corridor’s share price. All hope is not lost for shale gas in New Brunswick. Stay tuned for an updated article on Corridor.

I also bought more Raging River. My portfolio is also overweight Raging River. For the sake of good timings, this stock is one of them. Stock is at a 6-year low and I am off only by about 10%. Not so bad.

Disclosure: I am long CDH, GXE, MEG, RRX. Not for republication on Seeking Alpha.

Portfolio Update: MEG Energy And It’s New CEO

I am simply astonished by the choice of the Board of Directors of MEG Energy.

Derek Evans served as CEO of Pengrowth Energy from May 2009 until March 2018.

I extracted a weekly view of the stock price of Pengrowth from the time he became CEO of the company.

PGF TMX Money

Source: TMX Money

Shareholders never recovered.

MEG is still touting the prowess of Evans to streamline Pengrowth…

During his tenure, Mr. Evans streamlined the Company’s asset base from 35 properties to two growth assets, with over $9 billion of development opportunities.

MEG Energy Press Release, August 8, 2018

Evans did streamline the company. Although he streamlined Pengrowth from the many properties he himself acquired with debt.

To me this choice doesn’t make any sense at all. The market is also in disbelief as the stock fell 8% today.

The company has a great asset and egress out of Western Canada. It only needs a good leader shareholders can trust. It’s not the case currently. Really it’s more of the same.

I sold half of my position in MEG and I bought back Gear Energy. I am not cashing out my entire position only because I want to know what Highfields Capital Management will do. Highfields asked the Alberta Securities Commission permission to contact MEG shareholders directly.

The Filer wishes to communicate with the holders of Shares (the Shareholders) in advance of the Meeting to solicit such Shareholders’ proxies in respect of the business to be transacted at the Meeting. The Filer may wish to conduct the solicitations by public broadcast, speech or publication (the Public Solicitation) without sending a dissident’s proxy circular to each of the Shareholders.

Alberta Securities Commission Press Release, August 8, 2018

Highfields previously had a board seat. Daniel Farb resigned on July 24.

Disclosure: I am long MEG, GXE. Not for republication on Seeking Alpha.

Portfolio Update: Selling Gear Energy, Buying Peyto Exploration

I realized two new transactions in my portfolio today. It has been a long time since I traded.

I took profits by selling my position in Gear Energy. The stock currently looks weak in the short term.

GXE StockCharts.com July 26

Source: StockCharts.com

The WTI/WCS differential has been collapsing for the last couple of days… Yet again. This explains most of the weakness seen in Canadian energy stocks. I will nonetheless buy Gear again soon.

I bought a small position in Peyto and kept the rest of the proceeds in cash.

PEY StockCharts.com July 26

Source: StockCharts.com

Disclosure: I am long PEY. Not for republication on Seeking Alpha.

Gear Energy, Raging River Exploration: Exchange With A Fund Manager

The following is a conversation between a fund manager and me regarding Gear Energy and Raging River Exploration. This fund manager wishes understandably to remain anonymous.

Both of us make interesting points on recent developments regarding Gear and Raging River. Here is the conversation.

Fund Manager: I was reading your recent Raging River article and I noticed you mentioned Gear was selling their Duvernay land position. I own a bunch of Gear and talk to Ingram every couple months and I didn’t even know they had any Duvernay!

I have a few questions for you about it. Why do you think they’d sell it instead of hold it or drill it? And how do you come to your estimate of C$15M to C$20M of value for it?

I’m kicking myself for not knowing about this and grateful for you uncovering it and writing about it.

I’m thinking about Raging River, but I haven’t even finished your article yet, so I’ll hold off asking about your take on it. I know a bunch of their competitors thought the stock was overvalued considering the high base decline rate.

Cadotte Capital Partners: I didn’t know either… Not until I searched for Gear and Duvernay.

I figured with under 7,000 acres you don’t really have the scale to develop a meaningful new growth play. Gear can already drill for light oil in Central Alberta. In all, better to sell it, especially with big operators near the acreage (Raging River and Vesta). Both could be very interested to add to their land position.

I obtained a total value of C$14M using a valuation of C$2,000 per acre. This number could be way too bullish in retrospect… Raging River values its Duvernay position at C$400 per acre. The bidding deadline is tomorrow. We’ll see soon enough.

FM: Well, 7,000 net acres could be a huge number of locations, and it looks like Gear is in or near one of the cores of the play. Vesta is ramping up drilling big time and Raging River is just to the north and the combined company will likely drill more up there too. I get why Gear would sell it, but if it were me I’d hold it or maybe even drill one well and see what I have.

I don’t think you’re off in terms of what they should be able to get for it. I should probably be bidding on it, below C$10M, unless there’s near term lease expiries or something, I’d buy it! And I’m a little worried because the obvious bidders, besides Vesta, are Raging River and Crescent Point Energy. Raging River is otherwise occupied, and Crescent Point just got new management and the executive who was responsible for the East Duvernay play left.

Also, I noticed in some of your articles you’re referencing the Montney offer as a dollar per acre comparison metric. I think liquids rich Montney is apples and oranges with Duvernay. Not guiding higher or lower on either of those, other than my thoughts on adjacent-to-core East Duvernay land value above. There are also specifics of land positions that can dramatically alter their dollar per acre value metrics.

The Raging River and Baytex Energy merger is thought provoking. I’m tempted to start buying Raging River given the large drop in share price and the arbitrage with Baytex. But… Raging River wasn’t cheap: Valued at about 4X PDP, high decline rate, rapidly burning through inventory, waterflood apparently isn’t working because the decline rate doesn’t seem to be falling, and finally the fact that its doing this deal means that this was the best deal they could find, which is troubling. It could probably mean their East Duvernay play isn’t working how they hoped. I guess the question is how much does the share price needs to fall for a higher bidder to come along or for the combined company to be cheap enough to offer enough upside to buy.

CCP: Yeah, drilling one well… Gear might as well concentrate on its own assets. As I say: Go big or go home. And those wells aren’t cheap either…

Gear is tiny compared to its neighbors. Could be one of the reasons Neil Roszell wanted to get bigger: He knew he would need to have size to develop Raging River’s massive acreage.

The high decline rate, the high valuation of flowing barrels: I see a lot of people claiming Raging River wasn’t trading cheaply. I disagree. The consensus EPS is C$0.62 in 2018 and C$0.76 per share in 2019. Of course I don’t have access to the models of the analysts so these numbers are to be taken with a grain of salt. But at first sight it seems like Raging River is trading at under 10X earnings.

And free cash flow was just around the corner. Higher oil prices will increase free cash flow exponentially. Yes, the decline rate is high. But I believe it all depends on earnings. If a high decline rate is met with low drilling costs, or higher oil recovery, or anything that increases earnings, then in the end, even though the oil flowing out is depleting quickly, you’ll still be making money. My thoughts anyway.

As for the waterflood, I can’t find anything mentioning the results aren’t encouraging. All the latest presentations (January, February and March 2018) pointed to a possible recovery factor of 25%. The recovery factor I usually see for waterflood is 20%.

It’s troubling Raging River couldn’t find a better alternative… Clearly I overestimated the sentiment in the Canadian oil patch. It isn’t bullish for Granite Oil, another small company I own. It also started a “review of strategic alternatives”.

I slowly bought some more shares of Raging River. I was barely in the red. Turns out my entry point wasn’t so bad after all.

The low end of my price range was C$7.25 per share: Upside is about 20% upside from current levels.

Probably the only good news in the short term is that Neil Roszell will become Chairman of the new company. Hope he really takes a very active role and improve governance. No need to tell you Baytex could use a little bit of that…

FM: Interesting. Thanks for sharing your thoughts.

CCM: Sure thing!

Disclosure: I am long GXE, RRX. Not for republication on Seeking Alpha.