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The big guns are driving natural gas growth

Small upstart companies are usually associated with high-growth disruptive technologies that change the world. Microsoft, Intel and Google come to mind, while companies associated with typewriters, slide rules and encyclopedias are recessed memories. It's common for large incumbents to be put out of business when young upstarts revolutionize the landscape. At a minimum, the big laggards find it difficult to adapt to the onslaught of small and nimble entrepreneurs. But is this corporate evolutionary mechanism also applicable to the fast-changing oil and gas industry? Surprisingly not.

The shale gas revolution – that disruptive event that forever changed North America's energy markets – is no longer news. Over the past half-dozen years the gas that comes from artificially shattered rocks has displaced over one-third of all U.S. production. Such speed of adoption is usually reserved for smartphones, popular Internet apps, and absurd Christmas toys.

Large incumbents did not pioneer shale gas; Mitchell Energy was acknowledged as the innovator in the Barnett Shale years before others. Multi-stage fracking took off around 2005, and was aggressively championed by independents, many of them entrepreneurial unknowns. But the highest and most consistent growth of natural gas over the longer term has still come from the top 10 biggest producers. Like Microsoft or Google buying up trendsetters, some takeovers have added heft to the heavyweights; for example Mitchell was bought by Devon and XTO acquired by Exxon Mobil. Regardless of how it has come about, the average rate of expansion is most impressive in this top group, which is adding approximately 1.0 billion cubic feet per day (Bcf/d) each year to the U.S. supply base, far exceeding the contributions of smaller companies.

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For detail, let's look at Figure 1, which displays U.S. natural gas production by the top 30 (ranked by volume), publicly traded natural gas companies. Three tiers are shown, differentiated by size order. Within each tier is the group's average quarterly production, over time, starting in the first quarter of 2005.

Collectively, the top 30 publicly traded natural gas producers are delivering about 30 Bcf/d, which is not quite half of the total 65 Bcf/d American output.

It's not unusual for the biggest, incumbent players in any industry to represent the largest fraction of output, but what's less common is that they contribute to the highest level of growth during periods of disruptive change. Even a quick visual inspection of Figure 1 shows that the Top 10 group is growing much faster than the 11-20 and 21-30 categories.

And what of all the smaller guys, the contribution of all the companies below number 30 that deliver 35 Bcf/d of production? According to the Natural Gas Supply Association there are some 6,300 natural gas producers in the United States. So, the lesser 6,270 companies not captured in Figure 1, ranging from small mom-and-pop operations up to companies that produce 300 million cubic feet per day (MMcf/d), have added a respectable 3.5 Bcf/d since the shale gas revolution began. Yet data show that the combined output of the smaller players since 2005 has been choppy. Further, unlike any of the three tiers in the top 30, this diverse collective of junior participants has stalled in its output growth over the last 18 to 24 months. Surely, this is not surprising.

Smaller companies are having a much more difficult time accessing capital these days, and cash flows from low natural gas and natural gas liquids prices are too skinny to drive growth from wells that are costing multiples more than what they did only a few years ago. Finding, developing and producing shale gas at low cost is a very capital-intense business that requires logistical discipline and large scale.

There continue to be many successful high-growth gas companies in every size category, from large incumbents to start-ups. On a relative basis the latter can grow far faster, but the bias of the overall top-line growth toward the large is consistent with the knowledge that the disruptive extractive processes increasingly favour deep-pocketed, sophisticated companies that have the ability to drive economies of scale in a low-price environment. Well-oiled oil and gas titans are far from going out of business as a result of radical technological change; on the contrary, they are getting stronger.

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About the Author

Peter Tertzakian is chief energy economist and managing director with Arc Financial Corp. in Calgary and provides analysis on technology and energy-related businesses to fund managers and portfolio companies. More


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