Purchases of Canadian energy companies and assets are slackening as crude hovers near $100 a barrel and natural gas languishes after a three-year rout.
The gain in oil has made prices for oil reserves more expensive, limiting potential buyers, while analysts forecast natural gas will stay below $6 per million British thermal units for the next three years, less than half the July 2008 peak. A total of 231 million barrels of oil and gas reserves have been sold this year through May 18, less than half the 482 million barrels in the same period in 2010, according to National Bank Financial Inc.
The value of oil and gas deals in Canada -- which rivals Mexico as the U.S.’s biggest foreign oil supplier -- plunged 35 percent to $11 billion through June 15, the biggest drop since 2003, data compiled by Bloomberg show. The merger slowdown, which also affects the U.S., is having a deeper impact in Canada because energy accounts for almost 7 percent of gross domestic product, according to the Energy Council of Canada.
“It’s a much more selective buyer and seller environment,” said Trevor Loose, an investment banker with National Bank in Calgary.
The energy industry represents 4.6 percent of the U.S. economy.
Gas prices are set to remain near record low levels for the coming years, making it difficult for companies to recoup their investments, especially for smaller companies, Loose said.
Crude Rises
Crude-oil futures touched a 31-month high of $114.83 a barrel on May 2 and have gained 24 percent in the past year. Oil for July delivery rose 0.2 percent on the New York Mercantile Exchange. Gas prices have fallen 1.8 percent this year and are about a third of their peak of $13.58 in July 2008.
Gains in the price of crude over the past 12 months followed by a recent decline have made “a few people nervous,” said Michael Black, a Calgary-based partner with law firm Fasken Martineau DuMoulin LLP who advises companies on energy deals.
“Demand growth in China and the U.S. is also uncertain and this helps pile on the negative views.” That may limit the potential for transactions this year, Black said.
Prices for oil assets in Alberta, Canada’s energy-rich province, have soared. The average price per acre has risen to C$3,110.85 from a previous high of C$2,185.03 in July 2010, the government said on June 1. Alberta sells leases to land to fossil-fuel developers.
PetroChina, Encana
The largest energy deal in Canada in 2011 has been PetroChina Co.’s acquisition of Encana Corp. (ECA)’s natural-gas assets in British Columbia’s Horn River region. Excluding the C$5.4 billion ($5.5 billion) deal announced in February, the overall value of transactions is down by a third, according to National Bank figures, compared with same period last year.
RBC Capital Markets leads banks working on Canadian oil and gas transactions this year, with 10 deals valued at $6.5 billion. That compares with $5.7 billion for Jefferies Group Inc., according to Bloomberg data.
While transactions have slowed, there are still several targets that may be attractive for potential buyers, said Chris Damas, a Barrie, Ontario-based analyst with BCMI Research. Takeover candidates include Meg Energy Corp., Athabasca Oil Sands Corp. and Nexen Inc. (NXY), he said.
“Nexen is a value play,” Damas said. “There is no significant shareholder and there would likely be no contest if someone stepped in to buy. It’s basically on sale.”
Patti Lewis, a Nexen spokeswoman, did not return calls from Bloomberg seeking comment.
Alberta’s Reserves
Nexen, valued at about C$10.8 billion, and partner Opti Canada Inc. (OPC) have failed to meet production targets at their Long Lake oil-sands project, the company has said, contributing to a 10 percent decline in Nexen’s shares this year.
While transactions have been slow this year, sales of oil and gas assets will likely attract foreign buyers in the coming years, Alberta Energy Minister Ron Liepert said in a May 17 interview in New York.
With 173 billion barrels of recoverable reserves of oil, the third-largest in the world after Saudi Arabia and Venezuela, Alberta offers access to energy resources on a scale not available anywhere else in the world, he said, even with higher extraction costs compared with conventional reserves.
“What you’re going to see is continued Asian investment partners,” Liepert said, referring to the PetroChina purchase of Encana assets.
Oil Sands
The Canadian Energy Research Institute expects Canada’s oil sands to attract C$2.08 trillion in investments over the next 25 years, making it the largest engineering undertaking on earth. Chinese investors may contribute significantly to that investment in the coming years, said Wenran Jiang, a University of Alberta professor and senior fellow at the Asia Pacific Foundation.
“So far China’s overseas M&A investment has been really small,” Jiang said in an interview. “The Chinese would love to get into the Canadian energy market.” Though they’re “not willing to buy at any price.”
Encana and Cenovus Energy Inc. (CVE) have both said they’re looking for partners to help develop their gas and oil resources. Cenovus, Canada’s fifth-largest energy company, is discussing partnership opportunities with companies from Asia, the U.S. and Canada for a deal worth “billions” of dollars, Chief Executive Officer Brian Ferguson said in an April 27 interview.
Total, Suncor
Total S.A. concluded an agreement worth C$1.75 billion in December with Suncor Energy Inc. to jointly develop bitumen reserves in Alberta.
“We need to share because it’s cheaper,” said Total S.A. Chief Executive Officer Christophe de Margerie in Calgary on May 19.
The partnership, which provides Europe’s third-biggest oil producer with 200,000 barrels per day of production by 2020, may be a harbinger of agreements between other companies.
Korea National Oil Corp. said March 21 it would pay $1.55 billion to Anadarko Petroleum Corp. (APC) for a joint-venture stake in the Eagle Ford shale-rock formation in Texas.
On June 2, Petronas Nasional Bhd, Malaysia’s state-owned oil company, made its entry into Canada by agreeing to pay Progress Energy Resources Corp. (PRQ) as much as C$1.07 billion for stakes in natural-gas fields that may eventually be able to export the fuel to Asia.
Before deals pick up, oil prices may have to fall, said BCMI Research’s Damas. “Buyers need to see light at the end of the tunnel.”
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