This article was written by an oil and gas analyst at a Bulge Bracket investment bank.

An Introduction: Alberta Deep Basin

The Deep Basin, one of Canada’s premier natural gas plays, produces ~3.2-3.3 billion cubic feet per day (bcf/d) of gas and is cost competitive with premier US gas basins such as the Marcellus.

The Deep Basin borders the western edge of the Western Canadian Sedimentary Basin (WCSB) and is one of the deepest parts of the WCSB with both conventional (oil reserves that are extracted through traditional pumps) and tight reservoirs.

The Deep Basin, while underdeveloped, is an attractive region for producers as it has a low decline production base (production is stable and does not trail off quickly, lessening the need to explore for and develop new wells), high economic drilling opportunities (strong internal rate of return/IRRs at conservative oil price environments), and significant liquids-rich development upside (although a significant amount of current prodution is gas, there are many wet gas and oily opportunities that can be developed in the play – which have superior economics).

Source: Natural Resources Canada, NatGasIntel

The Deep Basin consists of many target development areas, some of which include Elmworth, Wapiti, Kaybob, Edson, Cardium, Wilrich, Falher, Doig, Nordegg, and the Belly River.

As the Deep Basin spans across Alberta, the transportation infrastructure in different regions within the Deep Basin may vary.

Portions of the Deep Basin that cover areas of the well-known Montney play will have relatively developed infrastructure with more efficient access-to-market (and therefore achieving better prices on their gas), whereas infrastructure in areas closer to the Duvernay will be relatively more scarce as the Duvernay is still considered to be in its early stages of development. The Deep Basin will continue to be one of the most exciting plays within Alberta as drilling/extraction technology improves and transportation infrastructure increases.

Major Producers in the Deep Basin

Tourmaline Oil – Deep Basin

On Oct 20, 2016, Tourmaline announced that they would acquire Shell’s Deep Basin assets and the NEBC Montney Complex for a total consideration of C$1.37B.

Tourmaline now holds one of the largest Deep Basin land positions with approximately 1.9M acres and approximately 6,250 horizontal drilling locations. Their Deep Basin assets have reached production levels of approximately 170,000 boe/d with current reserves of 871.9 MMboe (Jan 1, 2017). Tourmaline’s effective royalty rate for the Deep Basin is 5% with Finding and Development Costs (F&D)/boe of US$3.09 and operating netbacks/boe of US$10.84.

Cenovus Energy – Deep Basin

Earlier this year in Mar 2017, Cenovus acquired ConocoPhillips’ Deep Basin and Oil Sands assets for C$17.7B. The Deep Basin assets are focused in three operating areas: Elmworth-Wapiti, Kaybob-Edson and Clearwater, and Cenovus sees the assets as low decline, liquids-rich production with large upside potential.

Today, Cenovus holds one of the largest Deep Basin assets by production and net acreage, with a Q4 2017F production of 120,000 boe/d (26% liquids; 17% decline rate), and a total net acreage of approximately 3.0M. Cenovus’ Deep Basin 2P reserves are 725 MMboe (62% proved).

Cenovus’s acquisition included processing plants and other gas infrastructure that is currently not at processing capacity. As such, future developments will have no shortage of takeaway capacity.

Cenovus views the acquired Deep Basin assets to have been underdeveloped under previous ownership and looks to ramp up Deep Basin production to 240k boe/d by 2021. Cenovus looks to achieve this by improving capital efficiency in the area using a data-driven approach to drill longer horizontal wells and optimize well pad placement/

Cenovus perceives their Deep Basin assets to be short-cycle, cash flow generating assets that will be used to fund capital expenditures on their core oil sands properties.

Bonavista Energy – Deep Basin

Bonavista’s Deep Basin operations focuses primarily on the Wilrich and Bluesky development areas and have production of approximately 28,000 boe/d (89% gas) on net acreage of 321,337. Their Deep Basin 2P reserves at 2016 YE are 108.2 MMboe.

The high Natural Gas Liquids (NGL) content of the gas and shallow decline of their Bluesky play has resulted in impressive returns for Bonavista. They have also expressed interest in numerous Falher and Notikewin opportunities that they may pursue in the future.

Recent M&A Activity in the Alberta Deep Basin

October 5, 2017: Petronas’ Canadian Unit Looking to Sell its Deep Basin Assets

September 1, 2017: RMP Energy to Sell C$80MM of Assets to Tangle Creek Energy

August 16, 2017: Tidewater Midstream Announces Strategic Acquisitions within Deep Basin and Montney for C$31MM

August 15, 2017: Tidewater Midstream to Acquire 50% WI in Wapiti Pipeline System for C$20MM

July 7, 2017: Paramount Acquires Trilogy Energy in All-Stock Deal

March 29, 2017: Cenovus Acquires ConocoPhillips’ Deep Basin and FCCL Assets for C$17.7B

October 20, 2016: Tourmaline to Acquire Shell Strategic Assets in Alberta Deep Basin and NEBC Montney Complex for Total Consideration of C$1.37B

Recent Infrastructure Developments in the Alberta Deep Basin

July 4, 2017: Pembina places ~$2.8B of integrated capital projects into service. With this expansion, Pembina has four pipelines between Fox Creek and Namao, which allows Pembina to better service transportation demand from the Montney, Duvernay, and Deep Basin.

June 14, 2017: TransCanada invests $2B to expand NGTL system. This expansion program results from growing producer demand to connect low-cost Montney, Duvernay, and Deep Basin production to the NGTL system and move it to premium intra-basin and export markets.

Deep Basin Geology

The Deep Basin is characterized by a high saturation of hydrocarbons (abundant with oil and gas), abnormal pressure, and thermal maturity. The entire Lower Cretaceous is gas saturated with no mobile water, which means it is ideal for continuously growing drilling and completion technology. The Deep Basin provides production potential from over 15 prospective geographical formations to be pursued both vertically and horizontally, and it is relatively undrilled by American standards.

Related Reading for the Deep Basin