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A natural gas drilling rigSTEPHEN THORNTON/The New York Times

Canada's moribund natural gas industry is retrenching with cuts to capital spending and dividends as a sharp plunge in wholesale prices shows no signs of letting up.

Companies had already curtailed production through the fall to cope with a darkening outlook for the commodity following pipeline outages on TransCanada Corp.'s Alberta system that led to a buildup of fast-growing supplies.

Now, even the most efficient producers are recalibrating, a sign of deepening malaise in a corner of the energy industry that historically accounted for big employment gains and drove hefty budget surpluses for the Alberta government.

Last week, Peyto Exploration & Development Corp. chopped its monthly dividend by 45 per cent, to six cents a share, and slashed its 2018 budget to about $225-million, from a midpoint of $375-million that was set last November. It said production in 2018 would be 2 per cent lower against last year's total.

The company attributed the tough medicine to a 40-per-cent drop in near-term Alberta wholesale prices from the time it began mapping out its 2018 budget last fall. On Friday, gas for spot delivery in the province sold for $1.80 per 1,000 cubic feet, according to the NGX Electronic Exchange.

A deteriorating outlook for longer-term prices, known as the forward curve, has also made it harder for companies to use financial contracts to lock in future sales at higher levels, removing a major safeguard for cash flows in a falling market.

"We're an industry leader in costs, and we're saying we need to defer capital investment today because the returns are better tomorrow," said Darren Gee, Peyto's president and chief executive officer, in an interview.

"It's defensive, but at the same time it's the only thing we control," he added. "You can't sit back and say we're going to hope that the gas price is going to get better. That's not a strategy."

Calgary-based Peyto joins Tourmaline Oil Corp., Advantage Oil and Gas Ltd. and Painted Pony Energy Ltd. in tapping the brakes on spending this year while shifting focus away from gas deposits to drilling prospects with more valuable petroleum liquids.

Advantage's 2018 budget of $175-million this year is down from about $205-million set in 2017. Painted Pony expects to spend $185-million, versus more than $300-million in 2017. And Tourmaline, led by chief executive officer Mike Rose, cut spending this year to $1.08-billion from $1.52-billion previously.

Such caution contrasts with spending increases planned by companies whose production is skewed more toward crude oil. U.S. and global crude prices have surged as rising demand and production cuts help erode a worldwide glut.

Across much of North America, however, natural-gas supplies remain ample. That's true even with the record drawdowns from storage in the United States to cope with frigid winter weather that blanketed much of the eastern part of that country last week.

The Energy Information Administration said net withdrawals from natural gas storage totalled 359 billion cubic feet for the week ended Jan. 5, surpassing the previous record of 288 bcf set four years ago. Prices for gas traded in New York barely moved.

"I've never seen anything close to that, and gas was up only 4 or 5 per cent. Even when you have a cold winter, the market is still saying we've just got too much gas coming on here," Raymond James Ltd. analyst Jeremy McCrea said.

"Ultimately, what's going to need to happen to fix this is just more prudent investment decisions by gas operators, and some guys who aren't making money [will have to] start shutting in some of this gas volume here."

To cope, producers are spending more to coax higher-priced liquids out of the ground, while also diversifying markets in a bid to reduce exposure to weak Alberta prices.

Peyto said it plans to prioritize spending in Alberta's Deep Basin exploration region. The company also implemented a new marketing strategy, aiming to cut exposure to Alberta-based pricing to 40 per cent of volumes over time, from 100 per cent currently.

RS Energy Group analyst Samir Kayande said the move underlines the growing importance of marketing arrangements as Canadian gas struggles to compete with low-cost U.S. shale production.

"We've believed for quite some time that finding markets for gas is actually more important than resource development," he said. "Low cost isn't everything. It's having low costs, and having a market."

Follow Jeff Lewis on Twitter: @jeffalewisOpens in a new window

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