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    Haywood Capital Bullish on Canadian Gas


High storage levels, reduced US gas production positive for Canadian producers

by: Dale Lunan

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Haywood Capital Bullish on Canadian Gas

The door giving Canada’s natural gas sector access to new capital may not be closed as firmly as some have suggested, according to Haywood Capital Markets’ Q4/20 commodity price update released October 21.

Headlined “Treats (Not Tricks) More Likely for Natural Gas Investors this Winter”, Haywood’s update reports that it is “doubling down” on its bullish natural gas call amid Covid-19 concerns and possible Opec+ crude oil supply increases.

“The current outlook for supply-demand fundamentals point to the potential for the tightest winter market in more than a decade, with implied storage withdrawals potentially exceeding those of the 2013-2014 polar vortex winter,” Haywood said in the update, penned by analysts Darrell Bishop and Christopher Jones.

Through the summer, Haywood was consistent in its suggestions that futures prices for natural gas would trend higher towards its May 2020 forecast price of C$2.85/’000 ft3 in 2021, it said.

“This call has played out well and we continue to see momentum as winter approaches. We continue to favour the building natural gas sentiment,” the update says. And Canadian producers like Spartan Delta, Birchcliff Energy, Pine Cliff Energy and Pieridae Energy (which is developing the 10mn mt/yr Goldboro LNG project on Canada’s east coast) are well-positioned to benefit – Pieridae shares are targeted to increase by 100%, to C$1.10 from C$0.55.

Haywood’s latest price deck puts the benchmark Henry Hub price at US$3.25/mn Btu in 2021, up from the prior forecast of US$3/mn Btu, while the Canadian benchmark at AECO is now forecast to average C$3.25/’000 ft3 in 2021, a differential of US$0.84/mn Btu to Henry Hub.

The higher price forecast is being driven by US gas storage inventories that entered the 2020-2021 winter season at the high end of the five-year range, Haywood said, but the “massive” drop in US production since Covid-19 hit in March and rebounding demand from US LNG exporters suggest the 4 trillion ft3 storage surplus at the start of the winter could turn quickly to a deficit once winter arrives.

“Assuming normal weather, winter storage withdrawals could reduce inventories at a rate that is upwards of 7bn ft3/day higher from last winter,” the update said. “Under this base-case scenario, (the) end-of-March storage level is forecasted to be 1.2 trillion ft3 – 31% below the five-year average level of 1.8 trillion ft3 – while a cooler-than-normal winter could lead to the lowest storage levels on record.”