Grant Fagerheim is evangelical on the potential of carbon capture technology to help the energy industry do its part in combating climate change.
The founder and chief executive of oil and gas producer Whitecap Resources Inc. WCP-T runs two of the oil patch’s pioneering carbon capture projects. The Calgary-based company’s facilities in Saskatchewan and Alberta have stored the equivalent of a year’s worth of CO2 emissions from eight million cars since it began operations in 1984.
At industry events and sessions with politicians, Whitecap’s chief executive promotes sequestering carbon deep beneath the Prairies as a key component in Canada’s energy strategy.
“We understand the expectations of Canadians, along with worldwide investors, that decarbonization and reducing greenhouse gas emissions are essential,” Mr. Fagerheim said last year in a presentation to the federal Parliament. “We need to ensure broad and immediate implementation of carbon capture, utilization and storage technology beyond our existing projects.”
Last week, two of the country’s biggest banks showed they share the faith.
National Bank of Canada NA-T and Toronto-Dominion Bank TD-T lent Whitecap $1.1-billion to help pay for its planned $1.9-billion acquisition of XTO Energy Canada, which is jointly owned by Imperial Oil Ltd. IMO-T and parent Exxon Mobile Corp. XOM-N. The four-year loan increased Whitecap’s total credit capacity to $3.1-billion.
The takeover demonstrated that banks remain willing to open the vault to fund growth at energy companies with robust environmental goals. Oil and gas plays that lack the cash or commitment to keep pace in the increasingly expensive ESG arms race are more likely to be snapped up by larger rivals.
Whitecap’s acquisition marked this year’s second significant, debt-funded takeover of an oil company with properties in the Montney region, which straddles the B.C. border in northwestern Alberta. In March, Calgary’s Vermilion Energy Inc. VET-T acquired TSX Venture Exchange-listed Leucrotta Exploration Inc. LXE-X for $447-million, with Canadian Imperial Bank of Commerce CM-T advising on the transaction.
With senior oil and gas companies pumping out cash on the back of soaring commodity prices, analysts predict more takeovers are coming.
“Larger producers will continue to pursue deals to consolidate inventory-rich assets,” energy analyst Cameron Bean at Scotiabank BNS-T said in a report this week. He highlighted three mid-tier companies operating in Montney – Kelt Exploration Ltd. KEL-T, Crew Energy Inc. CR-T and Spartan Delta Corp. SDE-T – as potential takeover targets.
Cutting greenhouse gas emissions is one of many rising environmental costs facing oil companies. In a new report, RBC Dominion Securities analyst Luke Davis said buying XTO leaves Whitecap better positioned to deal with $1.5-billion in liabilities to pay for the cleanup of its decommissioned oil wells.
Whitecap’s carbon capture, usage and storage (CCUS) expertise isn’t the only reason National Bank and TD are willing to lend. The spike in oil prices following Russia’s invasion of Ukraine means energy companies have the cash needed to swiftly pay down bank loans.
In pitching the XTO takeover to investors, Mr. Fagerheim forecast the company’s total debt will hit $2.1-billion when the deal closes in the third quarter, then drop to $1.5-billion by year-end and $800-million by December, 2023.
Whitecap plans to double oil and gas production once it integrates XTO. The combined company’s proven reserves can maintain this level of output for more than 20 years. As debt comes down, Mr. Fagerheim promised Whitecap’s common stock dividend will go up, an investor-friendly approach.
However, these days it takes more than strong fundamentals for an energy company to win support from lenders. Lending to the oil patch was a hot-button issue at the banks’ annual meetings this spring. At the COP26 conference in Glasgow, Scotland, last fall, National Bank and TD were among the Canadians committing to the Net-Zero Banking Alliance. The global initiative of financial institutions is committed to aligning their lending and investment portfolios with net-zero emissions by 2050.
The only way banks square their environmental pledge with new loans to oil producers is to back companies such as Whitecap. When Mr. Fagerheim calls for additional investment in CCUS, by industry and government, he’s winning backers among bankers.
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