Slow times for oilpatch amid uncertainty
Oct 21, 2013 / 8:20 am
It's a tough time to be looking for a deal in the oilpatch, due to a combination of market uncertainty and confusion over federal foreign investment rules introduced during the past year.
With Canada's major energy companies set to report their third-quarter results over the next few weeks, observers say investors will be eagerly awaiting an update on how the firms are slimming their portfolios by selling non-core assets.
The likes of Talisman Energy Inc. (TSX:TLM) and Canadian Natural Resources Ltd. (TSX:CNQ) have had Western Canadian natural gas assets on the market for some time, and Encana Corp. (TSX:ECA) signalled recently that it, too, intends to pare down its gas holdings.
"Why we've not seen those assets being picked up is potentially a function of the sustained low gas prices. I think that there is uncertainty in the business community," said Lance Mortlock, a partner in Ernst & Young's oil and gas practice in Calgary.
There's also uncertainty over how quickly multibillion-dollar liquefied natural gas export facilities can be built on Canada's West Coast, enabling sales in lucrative Asian markets.
Brian Pow, director of research at Acumen Capital Markets, describes the current mergers-and-acquisition environment in the oilpatch as a story of "haves and have nots."
"There's a lot of broken companies and, generally, the game's changed such that the going prices to do drilling have gone up a heck of a lot," he said, noting that firms with the best management teams and production profiles are having an easier time.
Ernst & Young recently penned a report advising companies that it's no longer enough to rely on commodity price cycles or short-term, piecemeal cost-cutting measures to manage in these uncertain times. Instead, the study recommends companies use performance improvement programs that boost efficiency across the board.
It's an approach the manufacturing sector has used for some time, and one that's only beginning to catch on in Canada's oilpatch, Mortlock said.
"Staying competitive requires making more structural changes to your business that are more sustainable," he said.
Pow suspects the struggle to build new export pipelines out of Alberta and new federal rules on investments from foreign state-owned enterprises might be causing some hesitation as well.
Many oilpatch firms rely on foreign dollars to develop resources that would otherwise stay untapped for a long time. Typically a deep-pocketed foreign player, often state-owned, will kick in a portion of the funding needed to develop a resource in exchange for a slice of production. The Canadian company gets a much-needed cash infusion, while the foreign company can secure a stable supply of energy for its home country.
But, as former Conservative cabinet minister Jim Prentice noted earlier this month, foreign investment has dropped off recently -- and he says it's the new rules that are, in part, chasing it away.
Speaking at a London conference, Prentice, now a senior CIBC executive, said foreign investment in Canada had dropped precipitously this year -- $2 billion so far in 2013, down 92 per cent from $27 billion during the same period last year.
The rules came about late last year following intense public debate over whether Calgary companies Nexen Inc. and Progress Energy ought to be taken over by Chinese and Malaysian interests, respectively.
Though the Harper government ultimately waved those deals through, it put limits on the amount of control state-owned enterprises can have in the Canadian energy sector in the future.
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