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.

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