Foreign-based energy companies are fleeing Canada's oil patch and Canadian oil companies are doubling down, forcing upon investors a tough question: Who should they side with?
The question has grown particularly urgent after Cenovus Energy Inc. announced a $17.7-billion deal to acquire oil sands projects from ConocoPhillips Co.
The deal, which drastically reduces the Houston company's exposure to Canadian oil while Cenovus doubles its production, reinforces a trend of asset sales that is becoming hard to ignore.
Read more: Five things to know about the Cenovus-Conoco deal
In addition to the deal announced late Wednesday, the Netherlands' Royal Dutch Shell PLC, Houston-based Marathon Oil Corp., France's Total SA and Norway's Statoil ASA have all either sold big chunks of their oil sands exposure or exited the region.
The combined market capitalizations of these sellers (including ConocoPhillips) is $415-billion, or more than $70-billion more than the value of Canada's entire energy sector. If size means sophistication, then these sellers are the smart money.
The immediate reaction from the market appears to back up this assessment: Cenovus shares fell nearly 14 per cent to their lowest level since Februrary, 2016, when oil prices were in a deep depression. The shares of other oil producers, including Suncor Energy Inc. and Canadian Natural Resources Ltd. also fell. (ConocoPhillips, meanwhile, was up nearly 9 per cent on Thursday.)
And that's with the price of crude oil on a three-day winning streak, which would normally support energy stocks.
To be sure, there are aspects to the Cenovus-ConocoPhillips deal that are unsettling. It dilutes existing Cenovus shareholders and increases the company's debt load. If crude oil prices rise over the next five years, then Cenovus will have to fork over more money to ConocoPhillips under a "contingent payments" clause.
It's enough to make investors in Canada's oil patch wonder whether they should move on with foreign energy companies instead.
But there are compelling reasons to stay put – at least if you have the fortitude for volatility, feel optimistic about oil prices and have a contrarian nature.
For one thing, many of the decamping foreign energy companies are motivated sellers. They tend to be saddled with large debt loads that have become particularly cumbersome with oil prices down more than 50 per cent over the past three years.
The five energy companies that have sold oil sands operations have an average debt-to-equity ratio of 62.7 per cent, according to data from Bloomberg. That's about 10 percentage points higher than the average for Suncor, Canadian Natural Resources and Cenovus (before the deal with ConocoPhillips closes).
ConocoPhillips really stands out here, with a debt-to-equity ratio of 78 per cent and a debt-to-cash flow ratio of 5.4 – both well above Cenovus. In a release, it trumpeted debt repayment as a key feature of its oil sands sale.
Another reason to side with Canadian companies here is that the worst appears to be over for oil prices. They fell below $30 (U.S.) a barrel last year but have since rebounded more than 65 per cent.
No, the good times have not returned: Oil prices are well shy of the $100 a barrel back in 2014. But it's reasonable to expect prices could head higher as the global economy strengthens at a time when companies have been cutting back on energy exploration and development, setting up a possible supply shortage.
You can fret over the possibility that the Trump administration will impose a hefty tax on Canadian energy imports. But consider that this is the same administration that wants to get the Keystone XL pipeline built, bringing more Canadian oil to the U.S..
Lastly, consider which side – the sellers or the buyers – is showing better timing here. Statoil bought North American Oil Sands Corp. in 2007 for $2.2-billion (Canadian), when the price of oil was rocketing higher and the mood in the oil patch was ebullient. It sold last December for $832-million, amid depression.
Any other foreign company leaving the oil sands today is clearly selling at a deep discount to what they could have received just three years ago.
Canadian energy companies are buying low – and that usually works out.