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Poised to pounce Canadian Natural Resources in frontlines of cash-rich buyers able to take advantage of companies ‘stranded’ in tough environment Gary Park For Petroleum News
If you buy into the Murray Edwards school of thought — and why not, given that he is widely acknowledged to be one of the smartest investors in the Canadian oil patch? — the industry is headed for a shakeup over the next year or more.
The vice chairman and largest single shareholder in Canadian Natural Resources figures it will take at least that long for the business to climb out of the current economic mess.
“I think the risk is that the impact on Main Street is going to be far deeper and longer than we think,” he said at the end of CNR’s investor day in November.
For those with nerve and money that could be a time of plenty.
Edwards figures CNR, Canada’s second largest gas producer, is ideally positioned, with a strong balance sheet and access to credit lines.
He said there will be opportunities to “acquire others that don’t have the same flexibility on the balance sheet, don’t have the same underlying bank lines and don’t have the same ability to access capital markets in the private or public debt markets.”
Edwards said CNR recently made an offer for the debt of a smaller oil and gas producer — analysts think it was likely Compton Petroleum — and got rebuffed.
The same company then watched its share values cut in half as commodity prices tumbled — an example, Edwards said, that “just shows you that in this market there is going to be more than ample opportunities” for companies that have plenty of cash flow, strong operating teams and a clear focus.
Supermajors not expected He expects there will be a major downsizing of the junior sector as larger companies take advantage of depressed share values to bolster their oil sands or unconventional gas positions, but he does not believe that we will see a return to Canada of global supermajors such as ExxonMobil.
As a Canadian, Edwards said he would be disappointed to see a large part of the industry taken away from Canadian ownership.
“I think a lot of majors left Canada because they had a challenging time managing in the context of the capital constraints of Canada, the people constraints and the smaller (resource) basins.”
Similarly, John Langille, who shares the vice chairman’s post with Edwards, sees no reason for CNR to expand into the U.S. and try to replicate its Canadian position “where we have a large working interest. … We like 100 percent, with infrastructure already built, with operatorship of that infrastructure and a situation where we can exploit our assets.”
Edwards noted that CNR built its Canadian management group over many years and “for somebody coming back in, I just don’t see them being able to build that asset.”
Already, he said, France’s Total and Norway’s StatoilHydro, which have taken major stakes in the oil sands, are having trouble operating in Canada’s unfamiliar environment.
Speakers at a Calgary dealmakers’ symposium and acquisitions and divestitures forum held by Houston-based PLS, which provides a service platform for oil and gas buyers and sellers, painted a picture of what lies ahead during the downturn in commodity prices.
Echoing the views of CNR executives, they said the shortage of new capital will work in favor of cash-rich buyers and the slump in share prices will create fertile ground for hostile takeover bids.
Rush to sell expected Alan Tambosso, president of Sayer Securities, expects a “rush to sell companies that are distressed or underperforming before they have to (report 2008 results) in the first quarter of 2009,” predicting that will involve more share-for-share transactions between publicly traded companies and private-company takeovers of public companies for cash.
He is not counting on many property transactions because sellers will be looking to obtain full asset value.
Tambosso said potential deals will fail unless sellers are prepared to lower their price expectations in line with the drop in oil and natural gas prices and the increasing cost of capital.
Sayer has reported Canadian merger and acquisition transactions in the first nine months of 2008 at C$14.52 billion, off sharply from the C$39.47 billion in the same period of 2007 (when four deals topped C$5 billion each). Tambosso said next year’s results are not expected to be much higher.
Currently packages and properties totaling 50,000-70,000 barrels of oil equivalent per day are up for grabs, the bulk of the production in a few large bundles offered by EnCana and Penn West Energy Trust.
For 2009, Sayer is counting on a recovery in oil prices, while gas will stay flat, thus oil deals will generally be priced higher than gas deals, Tambosso said, adding that significant debt levels will make asset sales more important for some companies that need to brush up their balance sheets.
Juniors face tough decisions The toughest decisions face juniors, with Ted Hanbury, executive vice president of Daylight Resources Trust, noting they are worried about their ability to finance 2009 capital budgets.
He said the smaller companies are “not sure about the advantages of doing a deal right now, but they’re worried about the risk of doing one later.”
Hanbury said the continuing market volatility is creating a gap between buyers and sellers in the mergers and acquisitions market, which will remain “quiet until equilibrium is reached. As we move (into 2009) and people start to get their engineering and year-end reports, we think we’ll begin to see more alignment and, with luck, a bit of stability in commodity prices and equity markets.”
A pullback by hedge funds from investing in oil and gas futures has allowed fundamentals to again drive prices, the well-attended PLS conference was told.
Supply and demand Bruce Edgelow, vice president of the energy group at ATB Financial, the Alberta government-owned bank, argued the fundamentals are all about supply and demand.
He doubts that demand will abate; equally “I’m not going to say it’s going to grow as quickly as we might expect.”
Edgelow said he will not be surprised if oil prices drop even more because of OPEC’s inability to cut production and is no more optimistic about gas prices unless there is an exceptionally cold winter.
He said one large global player he declined to identify has slashed its planned 2009 Canadian capital budget by C$900 million, most of which would have been targeted at shallow gas, because the company did not want to be “held to ransom” by the debt markets.
On the mergers and acquisitions front, Edgelow forecasts the market will “heat up dramatically” in the first half of 2009, given reports of “unbelievable buys” among stranded juniors with 1,000 to 1,500 barrels of oil equivalent per day of output.
Other speakers voiced nervousness about the gas sector, given the new production coming on line that needs markets, but faces regulatory hurdles.
Unless there is a rebound in the economy, gas prices are likely to stay flat, said Joe Durante, managing director of Toscana Capital, which specializes in lending to producers of less than 2,000 barrels of oil equivalent per day.
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