The Duvernay Is Fast Becoming an Important Asset for Canada’s Oil Industry

The question remains, though: Will it pay off for investors?

| More on:
The Motley Fool

Non-conventional oil and gas plays have been a game changer for the North American oil industry. A combination of advances in technology (fracking, horizontal drilling) and shale plays (including the Eagle Ford, Bakken and Permian basin) has led to an explosion in U.S. oil production.

Whereas the U.S. non-conventional shale oil industry is advanced, Canada’s is still in its infancy — but signs are emerging that Canada’s shale oil formations could rival those in the U.S., if not have greater potential. A number of industry analysts expect unconventional shale oil and gas to play an increasing role in Canada’s overall oil and gas production mix.

What is the Duvernay?
One of the most promising shale formations is the Duvernay in west-central Alberta. The formation is believed to hold considerable resources; Alberta’s Geological Survey estimates that it holds around 443 trillion cubic feet of natural gas, 11 billion barrels of natural gas liquids, and 62 billion barrels of oil.

The high potential of the Duvernay has attracted a number of energy majors: Chevron, ConocoPhillips, Shell, ExxonMobil, Encana (TSX:ECA, NYSE:ECA), Husky Energy, Canadian Natural Resources, and Talisman (TSX:TLM, NYSE:TLM) have all entered the fray.

A key attraction for these energy companies is that the Duvernay’s super light oil and condensate are important diluents used to make bitumen produced from oil sands flow. Hence the attraction for ExxonMobil and its Canadian subsidiary Imperial Oil, Husky Energy, and Canadian Natural Resources, all of which have significant oil sands assets.

Canadian oil production is expected to explode over the next 20 years. The Canadian National Energy Board recently estimated that Canadian oil production will grow 75% between now and 2035 to 5.8 million barrels of oil a day, with the majority of this growth coming from oil sands.

As a result, demand should increase for super light oil and condensates. The National Energy Board estimated that demand for these products will more than double over the same time frame. Also important to note: selling at a 10% premium to Canadian crude, condensate generates higher margins for producers.

How can investors expect to benefit?
The Duvernay is an expensive proposition for companies to develop. It’s deep and expensive to drill. Producers operating in the Duvernay estimate that all-in well development costs are in the $10-$15 million range. This is significantly higher than the U.S. Bakken formation, where well development costs are estimated to be around $8.5 million.

Because deep pockets are needed, the larger, cashed-up players — Shell, Chevron and ConocoPhillips — have been active thus far. Another sign of the high development costs: troubled diversified energy company Talisman and oil junior Athabasca have signaled that they are seeking partners to help develop their Duvernay assets. Already, Talisman has made a $1.5 billion deal Canadian subsidiary of Malaysia’s Petronas, in which it sold a 75% interest in its Montney.

The larger companies’ exposure to Duvernay assets is minor compared to the scale of their operations. While that mitigates risk for investors, it also means that any drilling success is unlikely to be reflected by a significant bump in their share prices. (This despite both Chevron and Encana reporting impressive drilling results.)

In my view, the best opportunities exist with smaller players that are particularly active and having some success.

Two of the most promising companies are micro cap Yoho Resources (TSX:YO) and small cap Trilogy Energy (TSX:TET). Already Yoho receives 30% of its overall production from its Duvernay properties and Trilogy has drilled 11 horizontal wells. If either company experiences any significant success — a big if, to be sure — investors will be rewarded.

Foolish final thoughts
The Duvernay is shaping up to be an important asset for Canada’s rapidly growing oil industry — it has the potential to provide both higher-margin light sweet crude and valuable bitumen diluents. But it will take some time develop — and the jury is still out as to whether it will provide any direct benefit to investors at this time.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Disclosure: Matt Smith does not own shares of any companies mentioned.

More on Investing

Male IT Specialist Holds Laptop and Discusses Work with Female Server Technician. They're Standing in Data Center, Rack Server Cabinet with Cloud Server Icon and Visualization
Tech Stocks

Kinaxis vs. Descartes: Which Is the Better Tech Stock to Buy?

Top tech stocks like Kinaxis Inc. (TSX:KXS) and Descartes Systems Group Inc. (TSX:DSG)(NASDAQ:DSGX) are worth your attention right now.

Read more »

Canadian energy stocks are rising with oil prices
Energy Stocks

3 Energy Stocks I’d Buy in 2022

In 2022, I'm buying energy stocks like Suncor Energy Inc (TSX:SU)(NYSE:SU).

Read more »

edit Balloon shaped as a heart
Dividend Stocks

Why I’m Never Selling This Top Dividend Stock

This top dividend stock is in a sector that will pretty much always grow, with a dividend that's remained steady…

Read more »

House Key And Keychain On Wooden Table

Canadian House Prices Fall for 2 Months Straight!

The housing market is tanking. Are REITs like RioCan Real Estate Investment Trust (TSX:REI.UN) worthy alternatives to housing investments?

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

Got $5,000? Double it With This Passive-Income Stock

This passive-income stock has strong growth ahead as well as a solid dividend. This could lead to you doubling a…

Read more »

Stocks for Beginners

New to the TFSA? 4 TSX Stocks to Buy With $6,000

The tech stock selloff has created a March 2020-like opportunity to buy the dip. Here are four stocks to buy…

Read more »

Young woman sat at laptop by a window
Stocks for Beginners

New Investors: Start Investing in 2 Dividend Stocks With Peace of Mind

New investors who don't want to spend too much time managing their investments can consider buying these dividend stocks.

Read more »

Dividend Stocks

Here’s the Next Dividend Stock I’m Going to Buy

As the fear of recession increases, panic increases. At times like these, a dividend stock can mitigate your portfolio's downside.

Read more »