AltaGas's 195-MW Forrest Kerr Hydroelectric Facility is seen in this undated handout photo. Pipeline operator AltaGas Ltd. counts both Painted Pony and Kelt, both recently acquired, as major clients.HO/The Canadian Press
Utilities and banks stand to benefit as Canada’s oil patch goes through a round of consolidation, with some of the sector’s financially weak players picked off by rivals with far stronger balance sheets.
In the latest takeover, Canadian Natural Resources Ltd., one of the country’s largest and best financed energy companies, snapped up debt-heavy natural gas producer Painted Pony Energy Ltd. on Monday.
In late July, ConocoPhillips acquired B.C. properties from Kelt Exploration Ltd. for $510-million. Houston-based ConocoPhillips has a US$42-billion market capitalization, compared with $340-million at Calgary-based Kelt.
Pipeline operator AltaGas Ltd. counts both Painted Pony and Kelt as major clients. Analysts said replacing these relatively small, non-investment grade clients with deep-pocketed customers reduces the Calgary-based utility’s counterparty risk and opens the door to increased natural gas production and shipments.
AltaGas processes Painted Pony’s natural gas at facilities across northern British Columbia, including Canada’s first liquid propane terminal, at Ridley Island near Prince Rupert, which opened last year and cost approximately $500-million. The company also ships propane by rail, on Canadian National Railway Co. lines.
“Investors had been concerned with Painted Pony’s ability to meet its commitments, which should not be a problem for Canadian Natural Resources,” said analyst Robert Hope at Scotia Capital Inc. In a report, he said, “The strength of AltaGas’ counterparties had previously been a concern for investors, one we expect will largely dissipate.”
AltaGas’s stock price is up by about 8 per cent since the Kelt transaction was announced in late July, including an almost 2-per-cent gain on Monday after news of the Painted Pony takeover.
For lenders, the arrival of Canadian Natural Resources eliminates what may have become a problem loan. Painted Pony carries $347-million of debt, including a $325-million line of credit that was up for renewal at the end of the month and a $22-million unsecured loan from the federal government-owned Export Development Bank. The Calgary-based company began looking for a white knight when its board of directors decided they faced headwinds that included “potential near-term liquidity considerations.”
Loans to oil and gas companies make up between 4 and 8 per cent of all lending at Canada’s big banks – Royal Bank of Canada is at the low end of the range, while Bank of Nova Scotia and National Bank are at the high end. In a report last month, a week before the Kelt transaction was announced, analyst Darko Mihelic at RBC Dominion Securities said, “We believe we have seen the peak in performing provisions for credit losses in the second quarter of 2020.”
While a jump in takeover activity is good news for many sectors connected to the oil patch, consolidation isn’t expected to help oil field services firms, which have seen demand for their services slump since commodity prices fell in March, when Saudi Arabia launched a price war and the COVID-19 pandemic cut into economic activity.
Analysts say energy companies, large and small, have no plans to drill wells or develop new properties, activity that drives the fortunes of service businesses. At current commodity prices, the focus is on cutting costs and curtailing production.
“Our view is that oil field services recovery will be prolonged and disproportionately impacted compared to exploration and production companies, as as we believe producers’ first order of business in a recovery will be to resume shut-in production rather than fire up the machines,” said analyst Vladislav Vlad at Scotia Capital.
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Andrew Willis