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Canada mulls deal-making options Industry wavers when choosing between JVs, acquisitions in shrinking field; some companies opting to keep reserves for long term Gary Park For Petroleum News
Uncertainty rules as Canada’s corporate energy world faces three options in 2013 — joint ventures, mergers and acquisitions or just sitting tight.
And the range of possibilities underwent a radical shift late in 2012 when the Canadian government changed the rules covering takeovers of oil sands companies by foreign state-owned enterprises, SOEs, limiting those bids to “exceptional circumstances.”
At the smaller end of the scale, once fertile ground for M&As is turning fallow.
Bryan Mills Iradesso, a marketing and investor communications firm, estimates that only 47 junior conventional oil and gas explorers and producers were trading on the Toronto stock exchanges in the third quarter of 2012, compared with 93 in the opening quarter of 2066.
The firm’s yardstick for juniors covers those producing 500-10,000 barrels of oil equivalent per day.
Over the same period the ranks of mid-caps — those producing 10,000-100,000 boe per day — rose to 29 from 19.
Although fewer companies overall likely results in fewer transactions, Don Rawson, AltaCorp Capital’s managing director of institutional equity research, suggested that some juniors and mid-caps could be forced to take the M&A route because of restricted access to capital.
He said the greater difficulty companies have in financing operations the more likely it is that the pace of M&As will pick up.
New SOE rules a factor Scott Cochlan, a partner with the law firm of Torys, said the new rules blocking control of oil sands companies by SOEs may force outsiders to explore more creative joint-venture investments, minority investment positions and “comparable structures” that could be more complex than anything seen so far.
He expects foreign investors, especially those in the Asia-Pacific region, may be on the lookout for deals in Western Canada’s natural gas sector, especially if the commissioning of LNG projects progresses.
Chris Theal, chief executive officer of Kootenay Capital Management, is also counting on JV capital being robust for larger-scale projects, notably going to those with Duvernay leverage in west-central Alberta, or companies that are well-placed in liquids-rich gas.
Luke Parker, manager of Wood Mackenzie’s M&A service, said in a release that key areas to watch are Canadian unconventional gas, along with U.S. tight oil exploration-focused companies and LNG prospects in East Africa.
“While the U.S. will see the vast majority of investment, Canadian tight oil M&A could grow as embryonic plays are proved up,” he said. “We also believe that Canadian shale gas will continue to attract interest as a feedstock for future LNG developments, whereas U.S. shale gas M&A is likely to remain relatively subdued.”
Two schools of thought In the realm of trading reserves for heavy oil upgrading capacity in the U.S., or clinging to those assets there are two distinct schools of thought.
Speaking at a BMO Capital markets conference in New York City, Canadian Natural Resources rates reserves as more valuable, meaning it is sidestepping joint ventures, while Husky Energy estimates that negotiating upgrading/refining capacity in the U.S. is preferable because the capital outlay is about half what it costs in Alberta.
Canadian Natural Vice Chairman John Langille said his company is open to more deals along the lines of the 50-50 partnership it has established with North West Upgrading to build an upgrader/refinery near Edmonton, partly because that plant is guaranteed a share of the Alberta’s government royalty bitumen.
But he said Canadian Natural does not want to be a refiner. “We think we can make really good returns for our shareholders by sticking to E&P activities and developing the resources that we have.”
Waiting for others to de-risk He also said the company has been deferring capital spending on gas projects for about six years, while waiting for others to de-risk lands such as the Montney in British Columbia and Duvernay in Alberta, just as it did with the Montney Septimus field in British Columbia.
“In order for us to allocate capital to any one project it has to be able to make returns for us,” Langille said when asked whether Canadian Natural was interested in swapping land for capital to accelerate development of its Montney and Duvernay holdings.
“We have always taken the position that it’s better to keep the resource and have it for the long term,” he said. “It’s very difficult to get back (a piece of land assigned to a JV) once you’ve disposed of it.”
Husky Chief Operating Officer Rob Peabody said his company had once considered doubling the size of its Lloydminster heavy oil upgrader in Saskatchewan, but dropped the idea because of cost — and “has not fundamentally changed” that view.
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