Oil pumpjacks are photographed near Halkirk, Alta., in this 2007 file photo.Larry MacDougal/The Canadian Press
An exacting new financial stress test for companies looking to buy Alberta oil and gas assets is throwing potential deals into doubt, just as activity in the energy sector had started to pick up.
The Alberta Energy Regulator (AER) says greater scrutiny of the purchaser's financial health is necessary to ensure the environmental liabilities of the companies they want to buy are eventually taken care of. But bankers and analysts say it creates a smaller pool of potential buyers, and makes it harder for companies to offload properties.
Husky Energy Inc., Penn West Petroleum Ltd. and others could have trouble selling non-core assets, while smaller acquirers that don't meet the stress test "will be modestly handicapped" by the new rules, analysts at FirstEnergy Capital Corp. said in a research note. That group, the FirstEnergy note said, includes companies that are known for making acquisitions, such as Bonterra Energy Corp., Cardinal Energy Ltd. and Journey Energy Inc.
The move is in reaction to the Redwater Energy Corp. bankruptcy case ruling released last month, which stoked fears that the number of orphaned oil and natural gas wells in the province will soar, especially as more energy firms go bust after almost two years of lower oil prices.
The judgment came down on the side of a federal law that protects the interests of lenders and their secured loans over the province's environmental laws. The decision said receivers do not have to take responsibility for assets they deem to have no economic value – including well sites requiring costly cleanups beyond their current value.
The regulator and the Orphan Well Association have appealed the ruling, and the AER is working on new regulations to address the issue. On Monday, the regulator surprised many when it announced an interim step that will require all companies purchasing Alberta oil and gas assets to have a higher ratio of assets to liabilities than was previously the case.
The sudden change comes as the pace of transactions had accelerated after oil prices edged up from multiyear lows. Privately, some deal makers say smaller asset sales have already been halted, sapping sorely needed equity from the sector. One banker said Wednesday a transaction on the verge of closing is now "fully parked" because it no longer meets the new liability threshold.
Bill Andrew, chief executive officer of Long Run Exploration Ltd., said the rule change would not have an impact on the sale of his company to Sinoenergy Investment Corp., which received federal approval under the Investment Canada Act on Wednesday. However, he said he's concerned smaller companies will now find it harder to thrive.
"The classic entrepreneur's story for Western Canada is for smaller operators to buy assets from larger companies and slowly work on them, get them back and running, and this just looks like it's an attempt to put a stick in the spokes of that wheel," he said.
However, Brad Herald, vice-president of Western Canada operations for the Canadian Association of Petroleum Producers, said the AER had to do something. "What that says, if you're going to be buying stuff, you have to be well capitalized to operate it," Mr. Herald said.
"It shouldn't be a bet on whether prices recover quickly. It should be a well-capitalized firm."
On Monday, the AER said it will now require that all buyers have a liability management ratio (LMR) of 2.0 or higher – immediately following the transfer of assets. Companies can also take other actions, such as posting financial security.
The energy regulator said it made this change as a stopgap measure because the Redwater decision made clear that the usual threshold rating of 1.0 wasn't stringent enough.
"We realize that some proposed deals may not go through as a result of these measures," AER spokesman Ryan Bartlett said.
"However, we are doing this because we have seen some licensees that maintain an LMR at the minimum level required … purchase AER-licensed assets only to find themselves in financial difficulty within weeks or months following an acquisition."
Orphan wells are cleaned up by an industry-funded association. However, there are fears that the system could be overwhelmed – and taxpayers could eventually be on the hook. Mr. Bartlett said the new, temporary threshold better protects Albertans from paying for future environmental liabilities.
But Burnet Duckworth & Palmer LLP energy group partner Carolyn Wright said the regulator's bulletin puts a number of deals in jeopardy, and could actually increase the number of orphan wells if deals fall through.
"People are scrambling to see if they can still figure out ways to get them done," Ms. Wright said on Wednesday.
She added companies in the process of making deals are speaking with the AER this week to see whether the regulatory body will allow some deals to proceed, even without the 2.0 rating, if there are other measures in place to ensure that environmental liabilities will be covered.
Mr. Bartlett said that while the bulletin will apply to all applications submitted after Monday, it will not apply retroactively. "However, the AER may still impose conditions or require additional security deposits as part of any application."
Kelly Cryderman