More mergers in oil sector expected after Cenovus, Husky transaction

The wave of consolidation sweeping through the oil patch, highlighted by Cenovus Energy Inc.'s planned takeover of Husky Energy Inc., puts Canada’s largest homegrown energy companies in a position to expand their stakes in Alberta’s oil sands as foreign players sell holdings to reduce carbon emissions.

Cenovus’s $3.8-billion bid for Husky, announced on Sunday, is the latest in a series of multibillion-dollar acquisitions in the past two months that featured senior North American energy companies buying smaller rivals with weak balance sheets. Some analysts and bankers predict the current round of deal-making will continue, with two of Canada’s largest players – Suncor Energy Inc. and Canadian Natural Resources Ltd. – expected to snap up oil sands assets jettisoned by European majors.

Suncor and Canadian Natural look to the oil sands for the bulk of their reserves, and are focused on meeting environmental challenges and decreasing their greenhouse gas emissions by re-engineering the way they extract and refine fossil fuels in Alberta. For example, both companies are investing in capturing and storing carbon dioxide.

Industry experts also predict small to mid-sized Canadian energy companies will merge to cut costs and shore up their balance sheets – a dynamic that is already driving takeover activity in the U.S. market. In a recent report, analyst Jason Bouvier at Scotia Capital Inc. said these two themes – divesture of oil sands assets and an industrywide fixation on building scale – will support a wave of domestic takeovers.

In the oil sands, European companies Total SA and Royal Dutch Shell PLC are minority owners of large Alberta properties controlled by Suncor and Canadian Natural, respectively. A long list of foreign companies have already exited the oil sands. Mr. Bouvier and many other industry analysts expect Total and Shell to also eventually quit the region. “We believe the acquirers should be able to drive value via a good purchase price followed by real cost synergies," Mr. Bouvier said.

Scotia also predicts there will be further consolidation among Calgary-based oil sands producers, with MEG Energy Corp. a possible takeover target. MEG was the target of a hostile $3.3-billion offer from Husky in 2018, but Husky walked away from the bid rather than extend it early the following year, when commodity prices fell. MEG’s market capitalization is now just $717-million.

“Consolidation in the oil patch will be driven primarily by improved financial strength and liquidity, significant operating and capital synergies and access to markets," said Tom Buchanan, an executive at investment bank Origin Merchant Partners and former CEO of Provident Energy Trust.

China-based energy companies are expected to remain investors in Alberta’s oil sands, according to bankers and analysts, because the properties continue to match the companies' strategic goal of owning reserves with long life spans. Sinopec Group, CNOOC Ltd. and PetroChina Co. Ltd. already own stakes in four oil sands operations.

Increasing takeover activity in Canada would follow a wave of recent bid deals in the U.S. energy industry, including takeovers by Pioneer Natural Resources Co., ConocoPhillips and Chevron Corp. But the narrow field of potential oil sands buyers could limit activity in Canada, said Chris Cox, analyst at Raymond James.

“I think eventually it happens. I just don’t think the timing lines up with the M&A we’re seeing in the U.S.," Mr. Cox said.

Mr. Cox said the oil sands holdings operated by MEG represent attractive assets for would-be buyers, but from a corporate standpoint, the company’s $3-billion of debt is a stumbling block. “The other issue there is that the logical potential acquirers, like Suncor and Canadian Natural, have their own desire for a bit more deleveraging first,” he said.

In recent years, a parade of foreign-based oil companies have unloaded stakes in Alberta’s oil sands, including Equinor, Devon Energy Corp., Shell and ConocoPhillips. Now a rising tide of global investment interest based on environmental, social and governance principles has put the remaining foreign-held oil sands assets into question. Prices would undoubtedly be well below what the assets would have fetched five years ago.

This summer, Paris-based Total took a US$7-billion writedown on its oil sands assets. The company’s operating assets in Alberta include stakes in the Fort Hills oil sands project, operated by Suncor, and the Surmont project, run by ConocoPhillips.

Total shifted to recognizing only proven reserves on its books from those projects – as opposed to probable ones that it figures may not be produced before 2050, assuming a long-term Brent crude oil price of US$50 a barrel and waning demand for carbon-based fuels. In addition, Total – once an active acquirer of oil sands assets – will not approve expansions of those projects, it said.

It has already sold down part of its interest in Fort Hills, a project that will soon be able to produce at closer to capacity rates after the Alberta government this past week announced it would lift the production limits that have been on the province’s large oil producers since early 2019.

Shell, meanwhile, still has a 10-per-cent interest in the Athabasca oil sands project after selling most of its stake to Canadian Natural three years ago. The company has put its refinery in Sarnia, Ont., on the block, and in late September it plans to sell most of its refineries around the world, keeping only those it deems flexible and “strategically essential.”

In a recent report, analyst Greg Pardy at RBC Dominion Securities Inc. said Canadian Natural is the logical buyer of all these assets – the company is Athabasca’s operator and majority owner – and estimated the price tag would be $6.3-billion to $8.5-billion.