For whom takeovers loom

Historic lows in oil sands bitumen prices could open door to new consolidation round

Gary Park

for Petroleum News

With Alberta oil sands bitumen prices sliding into negative territory for the first time in their 50-year history, there is talk the trend will set off a wave of new energy deals, which may have started with two attempted takeovers totaling C$8 billion.

Canadian heavy crude, dominated by bitumen, has dropped below US$20 a barrel, which analyst Matt Murphy of Tudor Pickering & Holt said is less than the cost of production, lagging US$52 per barrel behind the benchmark West Texas Intermediate price.

He said the price slump has been focused on Western Canada Select, the blend of sticky bitumen and light condensate needed to facilitate movement of the crude through a pipeline.

“The reality is actually quite a bit worse than what the headline WCS differentials would suggest,” Murphy told The Canadian Press. “It’s not the actual realizations these producers are getting ... they’re losing money before they even produce their barrels at current price levels.”

Based on a recent sampling, condensate was selling for US$63 a barrel in Edmonton and accounting for 30 percent to 40 percent of the WCS barrel, which translated into a return of between 11 cents US and 28 cents US per barrel.

Murphy said that until now bitumen prices have always been in positive territory, even in early 2016 when oil fell below US$30 a barrel, but bitumen was still worth US$8 a barrel.

Consolidations possible

He told Bloomberg News there is every reason for well-run companies with good balance sheets “to take advantage of this environment.”

Pelletier said his firm has moved 25 percent of its energy investments back into Canada, after temporarily abandoning the country, to buy into likely takeout candidates whose shares have been beaten into “deep value” territory.

The value of acquisitions involving Canadian companies fell 16 percent in the first nine months of 2018 to US$55.8 billion compared with the same period of 2017, compared with a surge of 72 percent in US energy deals to US$300.2 billion.

Latest deals

That coincided with a C$6.4 billion hostile takeover by Husky Energy of MEG Energy, a pure play oil sands producer which was one of the first Canadian companies to attract a Chinese investor - in this case China National Offshore Oil Corp. which holds a 17 percent stake.

Among its flagship operations, MEG is involved in Christina Lake, which is targeting 260,000 barrels per day by 2020, Surmont, which is close to starting production, and May River, one of the projects on 800 square miles of development opportunities in northern Alberta.

Long rated as a prime takeover target, MEG is not ready to cave in to Husky’s offer, which Eric Nuttall, portfolio manager at Ninepoint Partners, which owns 2.5 million MEG shares, said “validates the quality” of MEG assets, adding he is certain another bidder will step in.

“In Calgary, hostiles rarely happen but now that the doors have been opened, there will be others,” he said.

Husky Chief Executive Officer Rob Peabody said his company brings several advantages to the table including plans to raise its downstream capacity and thus “insulate” itself from the heavy oil price discounts.

He said that if the deal is approved by shareholders in January, Husky will revisit a deferred plan to double capacity of its Lloydminster, Alberta, asphalt plant to 60,000 bpd, in addition to its 375,000 bpd of upgrading, refining and committed pipeline capacity.

Rafi Tahmazian, portfolio manager at Canoe Financial, said a Husky-MEG deal is part of a consolidation mode in Canada that is “about survival of the strongest and fittest.”

He said other companies that could match or exceed Husky’s offer are Suncor Energy, Canadian Natural Resources and Imperial Oil.