The uncertainty surrounding Alberta’s policy on gas and oil royalties has already caused several companies to shift capital into other provinces, and this should come as no surprise.
Premier Rachel Notley and her newly-elected NDP government promise to move quickly on their own royalty review, and description how the process works by the end of summer time.
The economic environment and markets are much different today, but if Alberta’s 2007 royalty review is any guide, some big shifts might be coming.
TD Securities analyst Juan Jarrah noted that the previous review had the unintended results of sabotaging producer spending within the province.
“Ultimately, we had B.C. and Saskatchewan earn their fair share of producer spending also it took the Alberta government a number of revisions and incentive programs to ultimately undo the negative impact of the royalty review in 2007,” he told clients.
For example, Alberta accounted for 81 per cent of revenue for crown land sales within the Western Canadian Sedimentary Basin in 2006, but that number dipped to 24 per cent by 2008. Meanwhile, land sale revenue in B.C. surged to 53 per cent from 15 percent, and Saskatchewan’s jumped to 22 percent from four percent.
“In our view, land sale activity is associated with producer intentions in the future, and in this example we anticipate seeing BC and Saskatchewan improve their share of crown land sale proceeds in 2015C2016 in the expense of Alberta,” Jarrah said.
Drilling saw a similar trend, with Alberta comprising 71 percent of activity (based on total metres) in 2007, but that figure fell to 58 per cent by 2009. Both B.C. and Saskatchewan saw gains in that period. An identical trend is anticipated for 2016-2017, as capex programs are typically set annually in advance.
This has Jarrah calling for M&A like a potential theme this year and next, since Alberta-focused energy companies with limited opportunities away from province seek future production and resource growth.
In B.C., the analyst noted that Leucrotta Exploration Inc., Painted Pony Petroleum Ltd., Crew Energy Inc., Yoho Resources Inc., and Chinook Energy Inc. could be attractive targets. In Saskatchewan, he highlighted Northern Blizzard Resources Inc., Raging River Exploration Inc., Rock Energy Inc., Spartan Energy Corp., and Torc Oil & Gas Ltd.