Up until this week, the wildly popular craze among investors everywhere was selling energy stocks.
They didn't just unload the struggling, debt-heavy oil and gas producers, such as Talisman Energy Inc. They sold everything, and when they were done, they sold some more.
With Repsol SA's $8.3-billion (U.S.) bid for Talisman now on the table, some are beginning to wonder if they sold too much energy. Yes, oil prices show no signs of a major rebound any time soon, given expectations for weakening global demand and OPEC's aim of beating the U.S. shale oil producers into submission on costs.
However, now that the market is getting used to a markedly slimmer outlook for cash flow and capital spending in 2015, the Canadian energy sector is starting to look like it was bloodied a bit too much.
Don't get too excited. Repsol's $8, or $9.33 (Canadian), cash bid for Talisman is no windfall for any investors in the Calgary-based oil producer who last year held stock in the $13 neighbourhood. But let's face it: Talisman's options as a stand-alone company dwindled as crude prices sank, and the offer is a fat premium to recent levels. As recently as last Thursday, the stock was at a multiyear low of $4.30 in Toronto.
Talisman chief executive officer Hal Kvisle said as much on Tuesday, that the company could have worked for more time to try to sell assets to reduce debt and refocus on holdings in the Americas and Southeast Asia had oil stayed above $90 (U.S.) a barrel. But things didn't work out that way.
In the absence of a bid, the company faced a future of trying to keep debt down by selling assets, eventually those that it relies upon for cash flow. Even then, buyers are becoming scarce, he said.
Unless there's some holdup at Investment Canada – and that seems unlikely given that Repsol is not state-owned and Talisman has no oil sands assets – the Canadian firm is destined for oil patch lore, like the many companies it acquired to get to its current size.
So what of the rest of the sector? The S&P/TSX energy index jumped 6 per cent on Tuesday, a meaty gain that comes after a 44-per-cent skid since June that took it down to 2009 levels. I'm certainly not calling the bottom, especially with oil prices still looking shaky, but apparently some investors looked at the Talisman deal and wondered if there's more value hiding someplace.
That doesn't mean legions of foreign buyers are suddenly lining up to buy Canadian assets on the cheap. Indeed, Repsol began looking at Talisman's Duvernay shale assets in Alberta six months ago, and then started slowly going over the rest of the business.
But perhaps the stronger players have been oversold. Suncor Energy Inc. and Cenovus Energy Inc., for example, have cut spending to deal with the price storm, but not to degrees that will mean big drops in short-term production.
Last week, Cenovus CEO Brian Ferguson said the oil sands producer is reducing spending by 15 per cent in 2015, but the cuts are being made to longer-term projects that do not pump out cash flow yet. He pledged not to tinker with the dividend.
Canadian Natural Resources Ltd. baked a $2-billion (Canadian) contingency into its $8.6-billion budget, so investors had already weighed the likelihood of a smaller budget.
Investors in Encana Corp. were wary of what the company's prospects might be following $9-billion (U.S.) of acquisitions in the very part of the business that Saudi Arabia is battling on price – U.S. shale oil.
However, the stock gained more than 7 per cent on Tuesday after CEO Doug Suttles showed he can be flexible to protect the company's balance sheet. The company's 2015 planned outlay of about $2.8-billion is about 10 per cent above this year's level, but below the company's signals of a month ago.
Clearly the industry is retrenching to deal with the brutal commodity price drop, but not all companies are on the ropes when it comes to high debt and declining cash flow.