Province’s royalty review makes oilpatch investors edgy
It’s been an awkward time for buyers and sellers in the oilpatch.
“It’s like the junior high dances I used to go to. People are hesitant, but they know they have to dance,” says Chip Johnston, a partner at Stikeman Elliott LLP in Calgary, noting both parties are holding out for better partners during one of the worst commodity routs in recent years.
Oil prices have lost more than half their value in nine months but, more worryingly, they remain unsettled, leaving hapless investors with little clarity on valuations.
“Uncertainty is not the friend of deal- making and the checklist of uncertainty is growing rather than decreasing,” says Craig Hoskins, a partner at Norton Rose Fulbright Canada LLP.
Falling commodity prices, compounded with inaction on pipelines, the election of the NDP government in Alberta — who immediately launched reviews of its royalty and climate change policies — and a federal election in October have added to global economic uncertainties.
The NDP’s victory on a mandate of reviewing the province’s royalty regime, corporate taxes and carbon emissions’ policy has also sucked the oxygen out of M& A deals.
The hazy outlook meant investors mustered only $ 9.7 billion in deals in the first half of the year, a 52- per- cent decline compared with the same period last year, according to Sayer Energy Advisors.
Cenovus Energy Inc.’ s $ 3.3- billion sale of its royalty lands to Ontario Teachers’ Pension Plan in June was the biggest deal of the first half — and also the most telling. Here was an oilsands’ stalwart that had a sixth of its equity erode in the first half of the year, looking to sell assets to strengthen its balance sheet, and the buyer was a domestic titan.
Notable by their absence are American private equity players or Asian state- owned enterprises that had been circling around Canadian oil assets the past few years.
“The U. S. private equity guys now paint a pretty apocalyptic picture of Canada — no transportation, currency disaster and high cost of production,” Johnston said. “So talking them into doing those deals, you have to come up with great assets and the right people.”
Meanwhile, China’s recent currency devaluation and internal reform have meant state- owned majors such as Sinopec Ltd., CNOOC Ltd. and PetroChina Ltd. are unlikely to sink a few billion dollars into Western Canada soon.
But some analysts believe institutional players are still kicking tires.
“I thought that the precipitous drop in commodity prices would stimulate M& A, and I continue to be of that view in some respects,” said Frank Turner, partner at Osler, Hoskin & Harcourt LLP. “I certainly think there are buyers out there … but price uncertainty is an impediment.”
Despite the dearth of transactions, there have been some “bullmarket” deals.
Crescent Point Energy Corp. swooped in to pick up Saskatchewan light oil producer Legacy Oil & Gas Inc. for $ 1.53 billion. Legacy chief executive Trent Yanko remarked at the time of the announcement that a Chinese SOE active in Canada had also pursued the company, but premiums were not enticing enough and the deal would have likely faced regulatory hurdles.
Whitecap Resources Inc. picked up Saskatchewan light oil producer Beaumont Energy Inc. for $ 537 million while Torc Oil & Gas Ltd. received additional funding from the Canada Pension Plan Investment Board to acquire Surge Energy Inc.’ s Saskatchewan and Manitoba assets for $ 430 million.
It has not been lost on investors that most deals have been done outside Alberta, where pending changes to the provincial royalty regime have cast a shadow over valuations.