Investors stir up Canada’s LNG sector

Jana Partners puts pressure on Apache to quit Kitimat; private equity firm Kern Partners launches new C$750 million energy fund

Gary Park

For Petroleum News

The jostling continues in Canada’s LNG field, with two investor groups trying to assert their influence.

Activist hedge fund Jana Partners is putting pressure on Apache to break up the Kitimat LNG partnership, while private equity firm Kern Partners has launched a new C$750 million energy fund, with an eye on advancing one British Columbia project.

In a letter to investors, Jana, having accumulated a US$1 billion stake in Apache declared that it wants the Houston-based company to trade its positions in LNG export terminals in Canada and Western Australia for U.S. exploration.

It is the most aggressive move yet to reinforce a lurking fear among Canadian gas producers and the British Columbia government that investors could undo their hopes of a windfall from LNG.

Apache was once the operator of Kitimat until handing over the controls to Chevron, while retaining a 50 percent stake, but the partnership has since been engaged in a protracted search for Asian buyers of an initial 5 million metric tons a year of LNG, forcing a continued delay in making a final investment decision.

Apache Chief Executive Officer Steve Farris has frequently expressed Apache’s desire to reduce its holding in Kitimat, despite committing C$2 billion to investment this year to keep the project on track amid signs of capital cost inflation, as Canada faces a challenge from competition for materials and labor.

A Canadian spokesman for Apache said only that the Kitimat team is pressing ahead with its marketing efforts.

He also told the Financial Post that Apache is “focused on continuing to execute our strategic plan to rebalance our portfolio and to focus our strategy on more predictable and profitable production growth in our North American onshore assets” - a clear signal that Kitimat is far from an unbreakable goal for the company.

Jana said in its letter that Apache has lagged behind its peers for a decade and needs to step up its restructuring efforts.

Industry sources have estimated that if Apache is able to sell off its position in Kitimat and the Chevron-operated Wheatstone LNG project it could reap up to US$4 billion in cash to fund share buybacks and reduce future spending.

New fund firm’s largest

Kern is already a participant in the newly disclosed Steelhead LNG venture which plans a terminal at Sarita Bay at the mouth of the Alberni Inlet on the west coast of Vancouver Island.

Kern partner Jason Montemurro said the hopes of converting British Columbia’s massive gas reserves into LNG for export to Asia will not achieve a breakthrough for at least another two years.

However, he expressed confidence that over the next decade the discount on Canadian gas could start to diminish, giving a lift to exploration and production companies that have languished for about five years.

Montemurro said that if LNG plans are conducted in a “respectful manner ... and in long-term partnership with First Nations” there is a chance to generate more value for upstream companies.

Of its first three funds, Kerns has about C$1.1 billion under management and has placed C$1.5 billion in its co-investment management program, joining a growing by private equity firms - including Altex Energy, Black Swan Energy, Cequence Energy and Seven Generations Energy - to play a role in financing the energy industry.

Seven Generations is already seen as a candidate for an initial public offering in the gas-liquids rich Montney formation in northwestern Alberta and northeastern British Columbia, which is generating a buzz among smaller players.

Montemurro said Steelhead has its sights set on smaller, independent producers who have yet to negotiate access to pipelines, adding that through a “fair and balanced” partnership investors will be able to finance and build pipelines.