U.S. investors are starting to look at opportunities in the Canadian energy sector again, and that could mean looser taps on capital in 2014 following a weak year in financing, BMO Nesbitt Burns Inc.'s top energy banker said.
U.S. investment dollars exited the industry in a big way in 2013 due to concerns about such factors as the deep discount on Canadian heavy crude versus U.S. light oil, uncertainty over opposition among First Nations to pipeline proposals and the summer's unusually wide price spread between Alberta and U.S. natural gas prices, said Shane Fildes, managing director and global head of energy at BMO.
Meanwhile, an energy renaissance continued to take hold at home thanks to growth in light-oil plays such as the North Dakota Bakken and the Eagle Ford in Texas.
"They always looked to Canada for kind of that growth element, because they really didn't have a ton of that in their domestic energy market from a U.S. perspective," Mr. Fildes said in an interview. "But obviously this tight oil, tight gas revolution gave them this domestic investment alternative that really took a lot of investment capital away from Canada."
Developers of such U.S. resource plays have put up impressive production growth numbers, but now fears are growing about transport infrastructure constraints as well as drilling and land costs, which eat away at revenues, he said.
Also, U.S. stocks became much more expensive that those in Canada in terms of multiples of cash flow per share, making the Calgary-based sector look like more of a bargain.
"Now what we're seeing is some of that capital – early stages, not a confirmed trend on average – re-look at Canada because it's just so cheap on a relative basis compared to the U.S.," he said.
Mr. Fildes pointed out that a host of senior Canadian producers, such as Encana Corp., Talisman Energy Inc. and Penn West Petroleum Ltd., are taking a cleaver to their asset portfolios as a way to focus spending on the best prospects and raise money to keep debt levels in check.
"From an investment perspective, it doesn't always pay to be early on those trades, and it's not like we're going to throw a switch and 2014 is going to be 180 degrees different than '13, but we're definitely seeing some positive signs," he said.
In terms of merger and acquisition activity, there is no shortage of oil and gas assets for sale, but the ratio of assets offered to deals closed has never been lower as buyers and sellers remain far apart on valuation.
"Back in the day, that was very high. We'd get 80 per cent of the deals we started over the finish line. Today, that's well below 50," Mr Fildes said.