Heavexit, Canexit Or Something Else?

Value Digger

The M&A activity in the global energy sector was not vibrant in 2017 compared to the years before 2014 when the ongoing energy downturn began.

However, most of the billion dollar energy deals in 2017 took place in the Canadian energy patch with a handful of international players selling their Canadian assets to Canadian companies. Specifically:

1) Statoil (STO) sold its oilsands assets to Athabasca Oil (ATH.T) in early 2017, as shown here.

2) Shell (RDS.A) and Marathon Oil (MRO) sold their oilsands assets to Canadian Natural Resources (CNQ) in March 2017, as shown here.

3) ConocoPhillips (COP) sold its oilsands assets to Cenovus Energy (CVE) in March 2017, as shown here.

4) Apache (APA) made the following deals whose total proceeds exceeded $1 billion:

A) It sold its light oil weighted assets to Cardinal Energy (CJ.T) in June 2017, as shown here.

B) It sold its natural gas weighted assets to Paramount Resources (POU.T) and an undisclosed privately-held energy producer in July 2017, as shown here.

And two more international companies will likely announce major deals in the coming weeks. Specifically, BP (BP) has been checking the possibility of selling its oilsands stakes while Petronas (PNAGF) has put a package of oil and gas assets in Alberta on the sales block that produce about 5,500 boepd (55% natural gas).

The aforementioned deals seem like a nationalization of Canada's energy sector while some industry participants claim that the international players exit Canada primarily due to the recent political changes in the country.

But this is not the case. The international energy companies do not abandon Canada given also that some other international players made big deals entering or increasing their presence in Canada in 2017. For instance:

1) Schlumberger (SLB) along with Torxen Energy acquired CVE's Palliser crude oil and natural gas assets in Alberta for cash proceeds of $1.3 billion, as shown here.

2) Hong Kong-listed MIE Holdings Corp. paid about $722 million for Centrica's natural gas assets in Western Canada that currently pump 56,000 boepd. The deal also includes two million net acres of land plus ownership in 11 major processing facilities. MIE partly funded the deal by selling preferred shares to Can-China Global Resource Fund, a China-based private equity fund focused on natural resources in North America, and Mercuria Energy Netherlands, a unit of a Swiss-based commodity trading company.

After all, the first key reason behind most of the aforementioned billion dollar deals is the fact that oilsands mining and in situ operations are among the costliest petroleum projects worldwide because the raw bitumen extracted must be processed and converted to a synthetic crude before being transported to refineries, mainly in the U.S.

What also weighs on the economics for the oilsands is the carbon taxes given that the conversion from raw bitumen to synthetic crude emits more carbon dioxide than production of conventional crude.

And the major energy producers are becoming more responsible when it comes to reducing their environmental footprint and their carbon emmissions.

For instance, CVE recently set a target to achieve a 33% reduction in upstream greenhouse gas emissions intensity by 2026 compared with January 2016 levels, while Shell's CEO Ben van Beurden stated that the deal with CNQ will bring about an absolute reduction in carbon emissions from its operations, which were 72 million tonnes last year:

“Shell is a long-time supporter of government-led carbon pricing mechanisms globally and has been a vocal supporter of both Canada’s and the state of Alberta’s climate plans”.

Therefore, the sellers above dumped their oilsands assets due to their challenging economics in an effort to streamline their portfolio while focusing on other areas with lower breakeven prices and higher returns on capital (i.e. the Permian Basin).

However, the high cost of turning the raw bitumen into usable fossil fuel is not the only key reason behind most of the aforementioned Canadian deals. The debt overhang is the second key reason behind some of these transactions in Canada.

Specifically, Shell had to clean up its balance sheet because it incurred a significant amount of debt after acquiring gas giant BG Group for $53 billion in 2016. Shell's purchase of BG Group has put the company behind only Exxon Mobil (XOM) on the list of largest energy companies by market capitalization. However, Shell's leverage was 3 times upon completion of this deal in 2016.

As such, and aside from the aforementioned deal with CNQ, Shell also sold some of its North Sea assets along with its Gabon assets in 2017 for a total of approximately $4.5 billion.

Moreover, APA's leverage was 3 times and COP's leverage was above 2 times in the first half of 2017, so both firms had to deal with their debts sooner rather than later.

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Disclosure: I'm long Cardinal Energy (CJ.T).

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Comments (1)
No. 1-1

Great summary! I will also stay far from Athabasca (ATH), a lot of heavy oil and high leverage.