As useless marketing exercises go, Ralph Klein's tour of Washington seemed to set the gold standard. The Alberta Premier last week met with U.S. Vice-President Dick Cheney and a bevy of politicians and industry executives to promote the oil sands. The Alberta publicity machine was hard to avoid. Visitors to the Smithsonian Institution were treated to the sight of a school-sized dump truck used in oil sands extraction. Take that, Texas!
If Mr. Klein's goal was to promote oil sands investment, the visit was worse than useless; it was counterproductive. The area around Fort McMurray is a development nightmare, with dozens of projects in various stages of construction. Most are over budget and starved for workers. Adding more billions to the $100-billion or so already committed to the projects would be like throwing gasoline onto a house fire. As Deborah Yedlin wrote in this space a few days ago, it's not even clear whether there are any oil sands leases left to buy.
But Mr. Klein might be smarter than he looks. Maybe the real mission was not to lure American development capital to Alberta, but to promote takeovers. Mr. Klein is about to retire. Wouldn't encouraging a flurry of deals be a sweet going-away present for his options-soaked oil buddies? This group could fill the Saddledome and includes Murray Smith, the Alberta government's cheerleader in Washington, who is the former Alberta energy minister and on-again, off-again Tusk Energy director.
If heating up the M&A market is Mr. Klein's true agenda, investors would have good cause to celebrate. They see the soaring values in mining, where Inco and Falconbridge each have attracted competing bids, and want the same. Falconbridge shares were worth $12 in 2003. Last year, they were in the low $20s. Today, they trade at more than $58. Inco has climbed 44 per cent this year alone. Oil prices are high and climbing again -- crude futures in New York went above $75 (U.S.) a barrel yesterday -- in spite of ample inventories. Discoveries are rare. Demand is insatiable. So why not oil takeovers too? All the industry needs is a catalyst, which may or may not have come from Mr. Klein.
Consolidation, of course, has been a persistent theme in the oil industry since 2000 or 2001, when Anderson Exploration, Chieftain International, Crestar Energy, Gulf Canada Resources, Poco Petroleums and Tarragon Oil and Gas were all bought or merged out of existence. In their place came a new breed of producer, the oil and gas income trust (PrimeWest, Arc Energy, Enerplus, among others).
The trust market is consolidating too. At the peak, there were 35 such trusts. Now there are 31. As trusts merge to boost liquidity, reserves and production rates, the number should dwindle to about 20, investment bankers say. Ditto the oil sands operators. Some of the small- to mid-sized players, like Deer Creek Energy, which went to Total of France, and BlackRock, which just went to Shell Canada, are getting snapped up.
What is not happening is the big-ticket takeover frenzy that is hitting the Canadian mining industry, where almost every company of any size, gold miners included, have been prey or predator in the past year. Greedheads beware: This is unlikely to happen in oil.
Valuations can take some of the blame. As oil prices tick back up, and as production volumes increase, price-to-earnings multiples get rich. Suncor, to take but one example in a recent Merrill Lynch survey, trades at 17.7 times estimated 2007 earnings and almost 28 times 2008 earnings. That's not cheap. This doesn't mean Suncor won't get taken out. It just means a buyer at these valuations must come equipped with an exceedingly bullish view on long-term oil prices.
Some big oil companies can be lumped into the special situations category. Petro-Canada comes with a golden share, meaning it's takeover-proof unless the federal government says otherwise. Even the Tories would probably be unwilling to let Petrocan go, unless it were to merge with a Canadian player (several years ago, there were rumours of a Suncor-Petrocan merger). Talisman Energy has been considered a takeover target since it unloaded its politically incorrect Sudan properties in 2003. But nothing ever happens. Talisman has a big presence in the North Sea, which was bought from various international oil companies. Having sold the North Sea properties, would the biggies buy Talisman -- market value $22-billion (Canadian) -- to get them back?
The Chinese have stakes in a couple of oil sands projects and may want more. Some analysts and bankers think Chinese oil companies will eventually buy a big-name operator, like Suncor or Husky Energy. But, again, investors shouldn't count on that happening soon. The Chinese got shut down in the United States last year, when they tried to buy Unocal. The Canadian and Alberta governments would come under pressure from the Americans to do the same if a big Canadian oil company became a Chinese target.
That leaves some of the middling oil sands names as the most likely targets, some of which, like North American Oil Sands, are private. If Mr. Klein was trying to use his U.S. jaunt to trigger a takeover wave, he still has some work to do.
Eric Reguly