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A natural gas pipeline in Alberta is seen in this file photo.TODD KOROL/Reuters

Private equity players face uncertain prospects as they seek to offload holdings in natural-gas-focused drillers rocked by two years of weak prices.

Several producers backed by private equity investors have hung "For sale" signs on their operations in recent months as the downturn in energy prices intensified.

Chinook Energy Inc. this month hired investment bank Peters & Co. Ltd. to explore options, including a potential sale. Its shareholders include Calgary-based ARC Financial Corp. and Alberta Investment Management Co., which manages the province's pension funds.

It joined sales processes launched earlier this year by Endurance Energy Ltd., backed by Warburg Pincus LLC, and Mosaic Energy Ltd., which is partly owned by Texas-based NGP Energy Capital Management LLC. Mosaic is being sold through a receivership that began in April, while Endurance entered restructuring in May.

Closely held NEP Canada ULC, backed by Houston-based Kayne Anderson Capital Advisors LP, is also on the block.

The moves are a reversal from what had been an expanding role for private equity in the oil patch. The planned exits also highlight souring prospects for Canadian gas producers, which have suffered as Alberta prices languish at multiyear lows.

Meanwhile, there is little chance that one of several multibillion-dollar export plants proposed for the Pacific coast will be up and running before the end of the decade.

Both facts will make it harder for sellers to attract top dollar, said Robert Mark, portfolio manager at MacDougall MacDougall & MacTier Inc. in Toronto. "There are deals going on, but you're not going to get value as a seller," he said.

To be sure, private equity has funded a number of startups, a sign that some firms are still hunting for bargains. And big pension funds remain active in the sector.

In June, Teine Energy Ltd., backed by the Canada Pension Plan Investment Board, paid $975-million for Saskatchewan oil assets owned by debt-hobbled Penn West Petroleum Ltd.

That deal helped push the value of second-quarter mergers and acquisitions in the upstream portion of the industry, excluding the oil sands, to $3.5-billion, according to Royal Bank of Canada figures. The other major transaction was Birchcliff Energy Ltd.'s acquisition of Encana Corp. assets in British Columbia, for $625-million.

Still, the recent pace of deal making could slow, in part because the market is "dominated" by gas-weighted assets, RBC analyst Shailender Randhawa said in a research note on Wednesday.

"Private equity remains a wild card and looks to us to be a net seller of assets," the analyst said.

Others see sales processes more as a reflection of the trough in commodity prices than as deals driven by major shareholders. Canadian gas prices could also strengthen if U.S. demand increases this winter, analysts say.

Chinook, for one, may attract a buyer because the company has minimal debt and its assets in British Columbia's Montney zone are viewed positively in the market, said Bob Fitzmartyn at FirstEnergy Capital Corp. in Calgary.

"It's just in this environment, like many, they're just undercapitalized to convert reserves into tangible production and cash flow," he said. "So what do you do?"

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:00pm EDT.

SymbolName% changeLast
BIR-T
Birchcliff Energy Ltd
+0.56%5.34
RY-N
Royal Bank of Canada
+0.48%100.88
RY-T
Royal Bank of Canada
+0.29%136.62

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