NGTL’s USJR Outages To Impact Q2/Q3 Production, Lack Of New Q4 Capacity Expected To Push Back H1 IPOs

Jan 30, 2017


NGTL’s Dec forecast for ~1.8 bcf/d outage on parts of their system in Aug should gain attention as producers reflect outages in guidance. The bigger issue for investors is the lack of new egress capacity in Nov/Dec, which is likely to cause many expected H1/17 Montney IPOs to be delayed until they have visible egress for growth..

Our research writes each month on the NGTL monthly outage forecast.  The NGTL system is the Alberta natural gas pipeline system within TransCanada.  The NGTL Dec monthly outage forecast [LINK]  was when we first saw a new planned ~1.8 bcf/d outage in Q3/17.  This was generally overlooked as it came out just before Xmas.   Our weekly Energy Tidbits memo (Dec 25, 2016 memo) highlighted this with an item “Big NGTL curtailments in Q3/17 and Q2/17”.  We further wrote “This week, TCPL/NGTL posted its “NGTL & Foothills Systems Monthly Outage Forecast December”, which is their customer update on receipt capacity by pipeline.  This is essentially a warning report on where receipt capacity is lower than normal, hence where there will likely be gas curtailments.  The primary focus for our review is the receipt capacity on Upstream James River Receipt Area of NGTL, which is the part of the NGTL system that has the biggest impact on the Montney, Duvernay and other multi zone Cretaceous sands.   The good news is that the system is running full this winter.  The bad news is that there are some very big curtailments coming in Q2/17 and even moreso in Q3/17.   NGTL estimates curtailments to hit 0.8 bcf/d in Q2, and ~1.8 bcf/d in Q3/17.  It is also important to note that NGTL says the Q3/17 curtailments will impact both interruptible and firm transportation.”  The Aug outage of ~1.8 bcf/d is 20% of the then 9.2 bcf/d capacity Upstream James River (USGR) Receipt.  The below NGTL map shows the USGR receipt area.

NGTL Operational Areas

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Source: NGTL

 

The significance of the Dec outage forecast was that the big ~1.8 bcf/d USJR curtailment in Aug was a new forecast outage that was not in the NGTL Nov monthly outage forecast [LINK], and that NGTL was warning it will impact both interruptible and firm transportation.  The June 0.8 bcf/d USJR outage was included in the Nov monthly outage forecast.

Last week, NGTL published its Jan monthly outage forecast [LINK]] and its forecast for NGTL USJR outages in the summer was essentially the same as the Dec forecast.  We highlighted this in our Jan 29, 2017 Energy Tidbits noting that there was “no change to the expectations for big NGTL curtailments in west Central Alberta and NW Alberta this summer”.  And that “the good news is that the system is running mostly full capacity this winter.  The bad news is that there will be some big curtailments coming in Q2/17 and even moreso in Q3/17.   NGTL estimates curtailments to hit 0.8 bcf/d in Q2, and ~1.8 bcf/d in Q3/17.  It is also important to note that NGTL says the Q3/17 curtailments will impact both interruptible and firm transportation
in the USJR receipt area.

NGTL – Outage Forecast For Upstream James River Receipt Area

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Source: NGTL

 

The investor focus will first be on making sure natural gas producers reflect the USJR outages in the summer production forecasts.  The ~1.8 bcf/d or 20% of USJR capacity is significant and will impact summer 2017 natural gas volumes for a wide range of west Central Alberta and NW Alberta producers.  The new outage forecast came out just before Xmas and were reinforced last week in the Jan outage forecast.   If producers haven’t reflected it in their 2017 forecasts, they will do so soon.  It is important to highlight that USJR outages don’t impact the value , quality or productive capacity of a natural gas asset.  It just means the producer can’t produce it for a period due to a pipeline restriction.

We think there is a bigger impact for investors in 2017 from the NGTL monthly outage forecast.  It is what NGTL is or, in this case, what they are not forecasting for Q4/17.  The NGTL Jan outage forecast only goes to the end of 2017 and we would expect to see added capacity in Q1/18.  However, at this time and likely not until July, NGTL is only forecasting USJR capacity to the end of 2017, and that is for additional USJR egress capacity of only ~0.15 bcf/d for Nov/Dec.  This would be less of an issue in 2016 when industry had low cash flows and capex.  But natural gas prices and capex budgets are much higher in 2017, and investor focus is returning to growth.  But the limited additional USJR capacity in Nov/Dec makes it difficult to see any significant egress solution out of USJR.  This could change.  Plus NGTL should start to forecast Q1/18 outages and capacity at USJR in July and this could provide the visibility to egress growth in Q1/18 in time for fall 2017 IPOs..

We hope it changes, but the lack of additional egress USJR capacity in Nov/Dec is likely to cause many of the potential Montney IPOs to not go public as expected in H1/17.  It would be far from ideal for an IPO in H1/17 and then be hit with NGTL USJR curtailments in Q2 and moreso in Q3 reporting.  On topo of that, the NGTL forecast for only limited added USJR egress capacity in Nov/Dec will make it difficult for these new names to provide visibility to investors for big growth to exit 2017.  Hopefully, once NGTL starts forecasting outages/capacity for Q1/18 in the summer, they start to forecast added egress USJR capacity in Q1/18 to provide visibility for growth to support a fall 2017 IPO.