Foreign deals proliferate in wake of rule changes

Encana Corp.’ s $1.18-billion joint venture with state-owned PetroChina Co. signals the first of many foreign deals as companies seek to navigate new Canadian rules that favour minority stakes over takeovers.

Athabasca Oil Corp., Talisman EnergyInc. and Canadian Natural Resources Ltd. may attract overseas investors eager to gain access to oil and natural gas resources, as the companies seek funds for drilling and development costs.

“There are probably going to be more joint ventures,” said Leo de Bever, who oversees $70 billion including Encana shares as chief executive of Alberta Investment Management Corp. in Edmonton. “Now that there is some clarity on the rules, people may feel less hesitant about getting into something that has political overtones, rather than just economic overtones.”

The agreement between Encana, Canada’s largest gas producer, and Beijing-based PetroChina is the first since Prime Minister Stephen Harper unveiled new restrictions on Dec. 7 for state-owned companies seeking to invest in the oilsands. PetroChina’s 49.9 per cent stake in the joint venture is in line with the rules, which prohibit purchases by state-owned enterprises unless there are “exceptional circumstances.”

Joint ventures are the “way of the future” for companies like Encana and Canadian Natural, said John Stephenson, who helps manage $2.7 billion at First Asset Investment Management Inc. including Encana shares.

“Encana has tons of land but so what?” Stephenson said by phone from Toronto on Dec. 13. “It’s been harder for them in a low gas price environment to make any dough.”

Under the joint venture agreement, announced Dec. 13, PetroChina will get a 49.9 per cent stake in Encana’s Duvernay Shale acreage in Alberta for $1.18 billion upfront and $1 billion in development costs during the next four years.

Athabasca Oil, Talisman and Canadian Natural also have acreage in the Duvernay, a formation that holds an estimated 443 trillion cubic feet of gas and 61.7 billion barrels of oil, according to Canada’s Energy Resources Conservation Board.

Athabasca Oil, holder of the largest publicly disclosed Duvernay rights with 640,000 acres, had its biggest two-day rise since September after the PetroChina deal was announced. Heather Douglas, a spokeswoman for the Calgary-based company, said CEO Sveinung Svarte wasn’t available to comment on potential joint ventures.

Encana fell one per cent to $19.76 at the close in Toronto, while Athabasca Oil rose 0.4 per cent to $10.31.

The size of Athabasca Oil’s Duvernay position, its ownership of infrastructure and recent drilling results make the company a “prime candidate” for a future joint venture, said BMO Capital Markets Corp. analysts Jared Dziuba and Randy Ollenberger said in a Dec. 13 note.

“This is an area where smaller companies will have to take partners in the future if they want to develop in a timely fashion,” Athabasca Oil’s Svarte said on Oct. 16.

The PetroChina purchase, which equates to $9,800 an acre in the Duvernay, implies a valuation of as much as $6 billion for Athabasca Oil’s Duvernay land position, according to Dziuba and Ollenberger. Canadian Natural’s 500,000 acres would be worth $4.9 billion and Talisman’s 350,000 acres $3.4 billion, Phil Skolnick, an analyst at Canaccord Genuity Corp. in New York, said in a Dec. 13 note.

Harper, who approved Chineseowned CNOOC Ltd.’ s $15.1 billion proposed purchase of NexenInc. on Dec. 7, said the acquisition marks the “end of a trend” in the oilsands.

Canada is deciding whether the PetroChina deal will be reviewed, Margaux Stastny, a spokeswoman for Industry Minister Christian Paradis, said in a Dec. 13 email.

Encana has reported as much as 300 barrels of petroleum liquids per million cubic feet of gas in the Duvernay, a formation analysts and executives have likened to the liquids- rich Eagle Ford Shale in Texas. Petroleum liquids include ethane, butane and propane that typically fetch higher prices than gas.