CALGARY -- There has been a lot of hype swirling around new unconventional natural gas plays in Quebec and British Columbia, but investors do not necessarily need to stampede toward big players like EnCana Corp. and Talisman Energy Inc. if they want in on the action, industry watchers say.
Instead, they might want to think about buying stock in junior explorers and oilfield services companies, said Mike Dawson, president of the Canadian Society for Unconventional Gas.
"I think the challenge you have is that the big companies have to go after the very, very large plays in order to have something that is going to be material to their bottom line," he said.
"But the smaller companies can, by just being in a serendipity situation where they have land in the adjacent areas, have a significant uptick that is material for them even though they haven't developed it."
Natural gas resources are considered "unconventional" when they are found in harder-to-access geologic formations like coalbeds, sand and shale rock. These resource plays require a great deal of technical savvy to exploit, but can deliver steady production for several decades.
A lot of excitement has been drummed up recently over a massive shale gas discovery near Trois-Rivieres, Que., that is thought to contain about four trillion cubic feet of natural gas.
Smaller-cap companies like Questerre Energy Corp., Junex Inc. and Gastem Inc. all saw their stock soar on news they would be partnering with Denver-based Forest Oil Corp. in developing the Utica shale formation. Calgary-based energy giant Talisman holds land in the area, too, which it hopes to start exploring this year.
The so-called Utica shale exploration prospects in the St. Lawrence lowlands area between Montreal and Quebec City is part of a larger geological formation that stretches from Ohio through the Appalachian Mountains in New York state north into Canada. Talisman is already exploring the southern part of the formation and has major property holdings in the area.
Other big shale gas exploration and development zones in the United States are the Barnett shale region in west Texas and the Fayetteville area of Arkansas as well as areas in the Rocky Mountain states.
EnCana and big Houston-based firms EOG Resources and Apache Corp. have holdings in northeastern B.C.'s Horn River Basin, which is rich in shale gas as well.
But BMO Capital Markets analyst Kent Porteous recommends investors look at smaller players with land in that area like Crew Energy Inc. and Storm Exploration Inc..
"Overall I'd say the junior companies are more levered to the upside at least near term than some of the bigger companies," he said.
However one major risk associated with the smaller producers in B.C. and Quebec is the lack of pipelines and gas plant infrastructure in place to carry the gas to market. Only the majors have enough capital at their disposal to make their plays commercial anytime soon.
"That's why you're seeing guys like Crew talking about being exposed to it, but not really planning on doing much with it until it gets proved up a little bit more by the big guys," said Porteous.
The smaller companies can "piggyback" on the bigger producers once they get their infrastructure in place, he said. Investors can also buy into firms that provide technical expertise and equipment to exploration companies.
"As these resource plays continue to become a larger portion of development activity in North America, each well, on average, is more and more service-intensive than it was in the past, which is obviously a boon for services companies," said CIBC World Markets analyst Jeff Fetterly.
Pressure pumpers like Trican Well Service Ltd. and Calfrac Well Services Ltd., as well as drilling companies like Cathedral Energy Services Income Fund, stand to benefit the most from the renewed interest in unconventional gas, he said.
But since many of these developments are in their infancy and not many wells have been built, it might take more than a year for the advantages to play out, BMO Capital Markets analyst Michael Mazar said, citing Precision Drilling Trust and Ensign Energy Services Inc. as other possible beneficiaries.
"While the proliferation of unconventional natural gas in Canada certainly helps them, it's so small at the moment that it's not enough to move the needle for companies that size," he said.
Because exploiting unconventional gas is so complex and costly, there are really only a handful of big players to choose from.
