In­vest­ment pil­ing into U.S. shale

National Post (National Edition) - - FINANCIAL POST - CAT­TA­NEO Fi­nan­cial Post ccat­ta­neo@na­tion­al­

Con­tin­ued from FP1

With ex­pec­ta­tions that en­ergy prices will be more volatile in the fu­ture, in­ter­na­tional com­pa­nies are bet­ting on projects that can be ramped up quickly, and Canada’s oil­sands have be­come too long a game to fit the new en­vi­ron­ment, said John Brussa, chair­man of the Cal­gary-based law firm Bur­net Duck­worth & Palmer LLP, and a direc­tor of six oil and gas com­pa­nies.

“The U.S. and in­ter­na­tional ma­jors are pil­ing into U.S. shale,” Brussa said. “You are see­ing a ro­ta­tion out of longer-term projects to short­er­cy­cle time projects.”

It was not the in­ten­tion of Cana­dian pol­icy-mak­ers to scare off so much for­eign cap­i­tal, yet they wear a big part of the blame be­cause they made it harder to get any­thing done in the oil­sands, by stretch­ing out pipe­line re­views, im­pos­ing car­bon taxes, cap­ping oil­sands de­vel­op­ment.

“If there is a shrink­ing pool of dol­lars go­ing into oil and gas ex­plo­ration, peo­ple are go­ing to look at it and say: There is an is­sue in Canada, so it’s off the list” of in­vest­ment des­ti­na­tions, Brussa said.

Even more un­cer­tainty comes from the U.S., where Pres­i­dent Don­ald Trump is con­sid­er­ing a border-ad­just­ment tax that would make it more ex­pen­sive to im­port Cana­dian oil and gas, he said.

The ex­o­dus is so large it re­frames the oil­sands as a re­gional in­dus­try led by four ma­jor com­pa­nies: Cen­ovus, Sun­cor En­ergy Inc., Cana­dian Nat­u­ral Re­sources Ltd. and Im­pe­rial Oil.

Many are wel­com­ing the re­turn to do­mes­tic con­trol. The sur­vivors will be larger, more nim­ble and more rel­e­vant mar­ket par­tic­i­pants.

They will be more aligned with Cana­dian val­ues, whether in in­ter­act­ing with abo­rig­i­nal com­mu­ni­ties or by ac­cept­ing higher en­vi­ron­men­tal re­quire­ments.

In the past, oil­sands com­pa­nies were heav­ily re­liant on for­eign cap­i­tal be­cause the do­mes­tic mar­ket was just too small to meet their needs.

The com­pa­nies’ high con­cen­tra­tion in one basin mag­ni­fies their vul­ner­a­bil­i­ties, for ex­am­ple if mar­ket ac­cess re­mains elu­sive, or if Cana­dian oil dis­counts per­sist, or if politi­cians keep pun­ish­ing the sec­tor be­cause it doesn’t fit their greenen­ergy as­pi­ra­tions.

In­deed, in a re­port to clients, Ray­mond James an­a­lysts ex­pressed con­cern that Cen­ovus has be­come a riskier in­vest­ment.

“Cen­ovus goes from ex­hibit­ing one of the strong­est bal­ance sheets in the peer group, to one of the most lev­ered, with in­vestors un­likely to find a lot of ap­peal at this junc­ture in the com­bi­na­tion of above-av­er­age fi­nan­cial lever­age mar­ried to as­sets with above-av­er­age op­er­a­tional lever­age,” the firm said in a re­port to clients.

“In ad­di­tion, the com­pany will be­come de­cid­edly less in­te­grated fol­low­ing this trans­ac­tion, with ef­fec­tively all of the ac­quired oil­sands pro­duc­tion be­ing in ex­cess of ex­ist­ing heavy oil pro­cess­ing ca­pac­ity just at a time that we ex­pect Western Cana­dian heavy oil sup­ply to be­gin breach­ing pipe­line ca­pac­ity out of the basin.”

With oil prices firm­ing, this should have been a time of re­newal, in­vest­ment and op­ti­mism in the oil­sands. In­stead, the flight of for­eign cap­i­tal means a con­tin­u­a­tion of chal­leng­ing times.

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