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February 3rd, 2020

Dear Subscriber                                                                                                                         
Positive Start to 2020
  • Gas prices are improving
  • NorthRiver completes acquisition of Enbridge mid-stream assets.
  • Crew Energy does creative financing deal
  • The Cannabis cloud disperses
Well that’s Australia Day done and dusted and it’s time to get back to school.  Last year was an Aunus Horribilis for the Canadian upstream sector so what does 2020 have in store for us?
Gas Prices Are Improving
It has been estimated that the Canadian economy loses C$20 billion per year due to lack of pipeline capacity.  This was made more painful for gas producers in western Canada last year with Enbridge’s Westcoast Energy T-South pipeline, one of the major export routes into the US, operating at reduced capacity all the way through the year until December.  For much of the year (Figure One) gas has been trading at or around C$1.00 Mcf although there were periods during 2019 when the spot gas price actually went negative!  
Investment returns from the Calima Lands will be dominated by the price of condensate or light oil but the price of gas also makes an important contribution to total returns. There appears to be a positive inflection point in project economics when gas prices are C$2.00 Mcf or better.  Fortunately, as we head into 2020 the T-South pipeline is now back at full capacity and with storage at a five-year low gas has been trading in the range C$2.00 to C$3.00 Mcf with the differential relative to US Henry Hub prices much reduced.  Looking ahead the Forward Strip, which is the gas price that can be locked in for future sales, is looking far more promising.  The Forward Strip, or futures curve, has been improving steadily since April last year.  When discussing the project with prospective financiers during 2019 we couldn’t get close to C$2.00 Mcf as a reference price but our prospects of doing so during 2020 are looking a lot stronger.
NorthRiver Completes Enbridge Acquisition
NorthRiver Midstream announced last week that it had closed the C$4.3 Billion acquisition of Enbridge’s mid-stream business in western Canada.  At the time the deal was announced NorthRiver noted that “the Enbridge business was strategically positioned for the continued development of the prolific Montney Basin” and they signalled their intention to invest in expansion. How is that relevant to Calima?  The nearest major pipeline to the Calima Lands was included as part of the acquisition (Figure Two).  The NorthRiver pipeline to the east of the Calima Lands offers access to the Jedney gas processing plant and from there to the major export routes that service western Canada such as NGTL/AECO, Alliance and T-North/Station 2.  In the future, as part of their investment strategy, inter-connects are being proposed to provide access to the Shell/Petronas’ LNG Canada Facility and the proposed Woodside/Chevron LNG Facility at Kitimat
Crew Energy Does Creative Financing Deal
Crew Energy, one of the better known Montney TSX listed companies announced an innovative funding transaction this month involving the sale of some of its processing infrastructure.  The company was able to make a significant profit selling an interest in its gas processing facilities realising C$70 million of new capital for the company without any dilution to shareholders and with minimal adverse impact on the cost of processing.  This just goes to show that when momentum builds there are often creative funding solutions available through infrastructure assets.  Food for thought.
The Cannabis Cloud Disperses
In Canada, with only a small tech sector (much like Australia), energy and gold have historically been the asset choices for investors seeking a higher risk/reward profile.  In more recent years in Canada, cannabis has sucked much of the risk capital away from gold and energy (less like Australia) reaching valuations that could only be sustained by using the commodity itself (Figure Three). 
As we floated through 2019 the cannabis cloud dispersed as returns plummeted.  Gold made a strong recovery through the second half of 2019 and in their preview of 2020 Cormark Securities suggest that a correction in gold or just a recovery in energy stocks to get back alongside gold could see significant capital inflows back into the sector. 

E&P stocks are now offering deep value and strong yields.  Capital inflows into the sector appear to have started with a number of the larger Montney names seeing sustained growth in their share prices.  Westbeck, the London based hedge fund that made a 40% return shorting US shale companies last year, has now turned its attention to investing in the Canadian E&P sector.  Westbeck Chief Executive, Jean-Lois Mee noted that Canadian companies are generating higher free cash flow without the rapid rates of production decline being experienced by their US counterparts.  Although it has not attracted much media attention the Canadian E&P S&P index outperformed its US counterpart through 2019. It takes time for recovery to work through to the underbelly of the industry where juniors like Calima live but ultimately the larger E&P companies who move first are our prospective partners and/or acquirers, so we see anything that is good for them being good for us also.

So, all in all notwithstanding the inexorable downward drift of Calima’s share price the management team faces 2020 with what to some might seem like irrational enthusiasm and confidence. 

The things that we predicted would happen with infrastructure and pricing appear to be happening so we must get ourselves in the best position possible to take advantage of whatever 2020 throws our way
Alan Stein Glenn Whiddon Micheal Dobovich
Managing Director Chairman In-Country Manager
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T: +61 8 6500 3270
T: +61 0 410 612 920  
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Copyright © 2006-2019 Calima Energy Limited, All rights reserved.

Our mailing address is:
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