Seven Generations Mulls Moving Beyond Gas Into Plastics, Powerby
Canadian energy producer would vie with global majors
CEO Carlson says company is looking for “the next big thing”
Being a fast-growing supplier of low-cost natural gas only gets a producer so far in a shrinking market. It’s that reality that has Canada’s Seven Generations Energy Ltd. looking beyond resource extraction.
The Calgary-based company is seeking options to ship its fuel off the Pacific Coast and to produce electricity and plastics. Moving into such capital-intensive projects would set Seven Generations apart from other domestic exploration and production companies, putting it alongside global heavyweights including Royal Dutch Shell Plc and Petroliam Nasional Bhd. that are proposing multibillion-dollar export terminals. It would also put it up against rivals in the power and petrochemical industries.
As Canada’s best-performing energy stock over the past 12 months, Seven Generations has defied a market downturn by growing output that’s profitable at low prices. With Canadian gas exports to the U.S. falling and competitors south of the border supplying more of Eastern Canada’s demand, Seven Generations isn’t content to depend on the North American market to soak up supplies of the fuel.
“We’re looking at the next big thing,” Chief Executive Officer Pat Carlson said in an interview. Commitments to one or more projects could happen soon and startup could occur in three to seven years, he said. “We think we need to be a provider of resources feeding a portfolio of opportunities. No matter where you are in North America, it’s oversupplied.”
The 62-year-old engineer and entrepreneur fleshed out the concept last Friday at the wheel of a Ford Expedition headed toward a Seven Generations well site. He was leading a media tour of the company’s operations about 100 kilometers (62 miles) south of Grande Prairie, in northern Alberta. The executive first proposed the ideas in a November 2015 letter to shareholders.
Alberta’s plans to phase out coal more quickly than expected and to subsidize gas-market diversification through petrochemicals makes a gas-fired power plant or polyethylene production facility attractive, Carlson said. The location of the company’s operations near rail and highway transportation is an added incentive, he said, standing in blue coveralls in the drizzling rain on a logging-road turnout near the gas fields.
Seven Generations is also considering options to partner with investors and other companies to export gas and propane in liquid form, which would require proving up more of the potential of its own lands to supply facilities for decades and potentially acquiring more gas-rich properties, he said. It could also mean that the buyers of the fuels, known as liquefied natural gas and liquefied petroleum gas, invest in the development of Seven Generations’ fields, he said.
“Our credibility is rising, making it easier to find a partner,” Carlson said. “People are coming to us.”
Investors are rewarding Seven Generations for its unrivaled rise in production of low-cost gas and hydrocarbon liquids, including propane, butane and condensates, according to FirstEnergy Capital Corp. The stock has risen 53 percent over the past year, the most among peers listed on the S&P/TSX Composite Energy Index, which has lost 10 percent, according to data compiled by Bloomberg. The company’s properties are in the Montney formation, which cuts across Alberta and British Columbia and contains about half as much marketable hydrocarbon resources as the oil sands, according to National Energy Board estimates.
The shares rose 2.6 percent to C$24.75 at 1:40 p.m. in Toronto.
“They had the financial capacity to keep drilling throughout the downturn,” said Cody Kwong, a research analyst at FirstEnergy in Calgary who is among 18 analysts to rate the stock the equivalent of a buy, according to data compiled by Bloomberg. The shares have no hold or sell recommendations.
The producer’s output has almost tripled to the equivalent of more than 100,000 barrels of oil a day from about 36,000 in the third quarter of 2014 just before its initial public offering of shares. Its cheapest gas now costs less than $1 per million British thermal units to produce, the lowest in North America according to a list of select projects in February from Credit Suisse Group AG. U.S. gas futures have averaged about $2 this year.
A change in the company’s strategy risks alienating some money managers. Rafi Tahmazian, a portfolio manager at Canoe Financial LP in Calgary, said Seven Generations is one of his largest holdings because of its “best-in-class management,” mix of commodities and low-cost production growth.
“With good companies, you get apprehensive if they try to change their stripes,” Tahmazian said. The company doesn’t need to alter its course, he said. “In sailing, you don’t typically leave wind to find wind.”
Carlson said he will act in the interests of stakeholders including investors in whatever path the company takes and that he will find continued success, citing his achievements building Seven Generations and three other energy startups, North American Oil Sands Ltd., Krang Energy and Passage Energy. That other producers aren’t as involved in market diversification isn’t a deterrent, he said.
“Our history has been coming into something when the original companies were getting out,” Carlson said, referring to the initial investments and drilling in the Montney lands. “My track record would say that I can manage enterprises over a broad spectrum that deliver superior returns.”