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CALGARY — — David Johnson remembers the dark days of last winter, when interest in small oil and natural gas companies like his was so low that investors in Toronto wouldn't even bother meeting with juniors seeking to raise money.
His company, ProEx Energy Ltd., has been chasing gas in unconventional plays in northeastern British Columbia since 2002, and has built up an attractive collection of prospects and healthy and growing production. He had enough money to operate, but investors had lost interest and the stock had fallen to a three-year low.
What a difference a winter — and a big leap in natural gas prices — makes. Since December, ProEx's stock is up 50 per cent, money managers are clamouring to get into its Montney play and Mr. Johnson can finally afford to sneak away to his boat off the Gulf Coast of Florida for a respite from the renewed energy rush.
"From an investor perspective, what's changed is the fundamental rejuvenation of the industry," he said this week from the deck of his boat.
A Duvernay drilling rig in the Alberta Deep Basin
Birchcliff Energy
ProEx Energy Ltd.
Duvernay Oil Corp
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"When you have one breakthrough it really sparks a whole series of incremental advances that are revitalizing the Western Canadian basin. It's got everyone pumped up, myself included."
Oil hit new records this week — including a record trade of $117 (U.S.) a barrel yesterday afternoon. That's created anxiety among motorists and economists but put the bloom back on the rose of Alberta's junior oil and natural gas industry and its increasingly unconventional resource plays.
The share prices of companies with exposure to those potentially lucrative areas are through the roof and interest in providing financing to them is returning in tandem, with a spate of major deals seen this month alone. (Measuring a cross-section of more than 100 companies, ARC Financial's Junior Producers Equity Index has risen by about 20 per cent in 2008. The TSX composite is up 2.9 per cent.)
While high oil and gas prices play a huge part in the turnaround, they're not the only factor. Investors, fleeing the carnage of the financial sector, are seeking a safe haven for their cash — and they appear to be attracted to the promise of new technology that is taking companies like ProEx and Birchcliff Energy Ltd. to new frontiers. Another unconventional gas player, Birchcliff's stock has more than doubled since December, prompting the company to launch a new equity issue in February that was oversubscribed by at least twofold.
It's a dramatic shift in sentiment. The junior sector had been wallowing in misery for nearly two years, a slump that started with the implosion of the country's energy trusts in 2006, when Ottawa took away the popular option that had created a wealth of buyers for the growing assets of junior companies.
A cocktail of other factors — disappointing gas prices, higher costs, and changes to Alberta's royalty regime — had driven investors further away from the sector. Share prices bottomed out in December and January. Lines of credit ran dry. The outlook was bleak.
What changed wasn't just perceptions of where commodity prices were headed, although that didn't hurt. Instead, there was a realization that junior companies are mastering the exploitation of unconventional resources at a time when demand for oil and gas looks to be stronger than ever — a heady combination of factors that, to many investors, smells of substantial long-term gains.
"The basin is changing, and the business model is changing too. Conventional firms can still be successful, but the economics are getting more difficult, in Alberta especially," said John Chambers, president of Calgary-based First Energy Capital Corp. "Resource plays — with their longer reserve lives — are the focus."
NEW FRONTIE RS
For Canada, the sea change is not the return of juniors but the fact that their hottest fields aren't necessarily in Alberta, the country's traditional oil and gas home. Companies are looking to the booming Bakken and Shaunavon oil fields in Saskatchewan, and even to the possibility of producing gas from shale rock in Quebec.
The greatest excitement, however, is in the Montney play, located mostly in northeastern British Columbia, although it extends into Alberta. (It gets its name from a B.C. town close to the Alberta border, northwest of Fort St. John.)
