Buying oil sands assets for $32 billion total makes CNRL, Cenovus world class energy companies
Cenovus buys ConocoPhillips oil sands assets for $17.7 billion Wednesday. Last week CNRL buys Shell and Marathon assets for $14.4 billion. Are super-major oil companies fleeing Rachel Notley’s NDP government or are the sales a sign of Alberta oil sands companies arrival on the global stage?
“Investors have no faith in the NDP government’s ability to create an environment for companies to succeed. They’re celebrating this move that relieves their exposure to the NDP’s ideology,” Wildrose energy critic Drew Barnes said in a press release.
“It has become crystal clear that under the NDP, Alberta is no longer a desirable jurisdiction for major energy companies to do business.”
PC party energy critic Rick Fraser echoed the WRP in his comments.
Are Barnes and Fraser correct?
No, they’re not. In fact, the “capital flight” story is driven entirely by politics and supported by WRP and PC talking points, not reality on the ground.
The real story here is the emergence of Cenovus and Canadian Natural Resources Ltd. as major oil industry players, according to Kent Fellows, an economist in the School of Public Policy, University of Calgary.
“If you look at the recent developments in the Western Canadian oil industry, the 2014 price downturn was a major punctuation point for the sector, and now you have large firms willing to take large stakes in the oil sands, that’s another major punctuation point,” he said in an interview.
Fellows agrees that the huge “super-major” oil companies – which includes Shell and ConocoPhillips – often invest in new oil and gas basins, using their access to capital, project management expertise, and technology to skim the cream from early-stage developments. As the plays (such as the Alberta oil sands) mature, the high costs of the super-majors makes it more economic to divest and put their capital to use in different plays.
“These are large players and they shuffle their very large [asset] decks all the time. They can pick and choose the jurisdictions they’re in,” says Fellows.
Typically, the big boys eventually sell to smaller, more nimble domestic producers – like CNRL and Cenovus.
“CNRL and Cenovus know the space really, really well. The know the geology, which is a major competitive advantage. And they’re willing to put in the time to keep up with and manage the cost of complying with changing regulations, which we’ve had lately in Alberta,” said Fellows.
Let’s deconstruct the key points of the capital flight argument.
One, the focus on capital leaving Alberta.
While the sellers (Shell, Marathon, Conoco) may deploy the capital they receive from the asset sales outside Alberta, Shell and Conoco will still maintain operations in the province. Both companies will be much smaller, but that could change in the future if oil prices pick up in a year or two.
More important, the sales required an inflow of capital to finance the deals, capital that was provided in part by Wall St.
CNRL borrowed up to $9 billion ($3 billion term loan, up to $6 billion in bridge financing) in US and Canadian debt capital markets. The financing was arranged by two Canadian banks and Wall St. heavyweight J.P. Morgan Chase Bank N.A.
According to Cenovus, its purchase will be financed with a $3 billion bought-deal offering of stocks, a portion of existing cash on hand, and bridge financing of $10.5 billion, fully underwritten by the Royal Bank of Canada and J.P. Morgan Chase Bank.
So much for Kevin O’Leary’s claim that capital is fleeing Alberta.
Two, Shell and ConocoPhillips had perfectly good business reasons for selling oil sands assets.
Shell purchased BG Group a year ago for $53 billion and announced at the time that it would sell $30 billion of assets to help pay down the debt it took on to make that deal. Shell CEO Ben van Beurden said the funds from the CNRL sale would “make a meaningful contribution to Shell’s $30 billion divestment programme.”
In 2016, ConocoPhillips announced a 3-year plan to reduce debt and support its stock price with a share buy-back plan. The deal with Cenovus fit squarely within that strategy, according to CEO Ryan Lance: “Our stated plan was to accelerate our value proposition by reducing debt with asset sales.”
And let’s not forget the Cenovus and CNRL business strategies that drove them to purchase the oil sands assets.
“Consolidating our ownership at Foster Creek, Christina Lake and Narrows Lake has consistently ranked as our best strategic opportunity to increase leverage to a portfolio of top-tier oil sands assets,” said Cenovus CEO Brian Ferguson in a press release. “I’m confident this transaction will create substantial shareholder value for years to come.”
“It is a rare opportunity to be able to acquire a world class oil sands mining and upgrading asset like AOSP. Unlike a greenfield development, there is no execution and construction risk or delays – this transaction is immediately cash flow and earnings accretive to Canadian Natural shareholders,” said CFO Corey Bieber.
“The way the deal has been structured also facilitates immediate improvement to most of the company’s key credit indicators.”
The truth is that the CNRL/Shell/Marathon and Cenovus/ConocoPhillips deals represent a seminal moment for the Alberta oil sands industry. March, 2017 will be remembered as the time when homegrown companies managed by homegrown executives employing homegrown workers really hit the big time.
Three deals totalling roughly $32 billion is world class in any oil and gas jurisdiction.
A final word to Barnes, Fraser, O’Leary, and the Alberta and Canadian media that have propped up their talking points: Trying to spin this story as capital flight hurts the Alberta industry.
Scoring cheap political points actually could scare away capital. Or, at the every least, damage the international reputation of the oil sands, which could make it tougher to attract capital, especially for smaller industry players.
Albertans should celebrate the confidence – $32 billion worth – international investors have in Alberta oil sands companies. March has been a very good month for the industry and the provincial economy.
I’ll leave you with this comment from Chelsie Klassen, spokesperson for the Canadian Assoc. of Petroleum Producers: “This deal signals a strong, long term view of the value of Canada’s oil and natural gas assets. Among our competitors for global oil supply, Canada leads in energy security, regulatory stringency and environmental protection, including action on climate change.”