Canada Pension Plan Investment Board is on the hunt for unloved energy assets as it seeks to build out its natural resources investment prowess in the United States.
CPPIB said Wednesday that it would partner with private Houston-based firm Encino Energy LLC to invest up to $1-billion (U.S.) in oil and gas-producing assets in the United States, looking beyond the hot spots of western Texas and pockets of Oklahoma to wring profits out of smaller assets being sold off by large companies. Encino will put up to $25-million into the venture, called Encino Acquisition Partners, and be the operator of any acquired assets.
"There's been a tremendous amount of attention paid to the key shale plays," said Avik Dey, head of natural resources at CPPIB. "And as companies turn their attention to these capital-intensive, larger opportunities, they're rationalizing great smaller to mid-sized assets to fund those commitments. This acquisition vehicle, Encino, is going to be specifically targeting some of those opportunities."
The pension plan is casting its gaze south of the border as oil prices tumble back below $50 a barrel, heaping more pressure on a Canadian industry already struggling with investor fatigue.
Major oil companies have sold billions' worth of oil sands assets, shifting capital to lower-cost shale regions such as the Permian in West Texas and New Mexico that offer juicier returns more quickly. Shale deposits have also been targeted by private-equity funds and investment firms that view such assets as more economic at lower oil prices.
Indeed, moves by U.S. President Donald Trump to roll back environmental rules in the United States have stoked deep-seated concerns about the competitiveness of the Canadian sector, which faces higher costs and more stringent climate-change policies. Energy shares on the Toronto Stock Exchange have skidded roughly 20 per cent since the start of the year.
CPPIB has been dialling up its investment interest in U.S. natural resources over the past two years, assessing and bidding on assets.
Mr. Dey expects that a number of resource investment opportunities will emerge in the United States over the the next three to five years and said CPPIB has been expanding its team of professionals to identify potential deals. CPPIB will be looking at assets valued at $500-million to $1-billion through its partnership with Encino.
CPPIB's energy portfolio is nearly 80 per cent allocated to Western Canada and U.S. assets would diversify its holdings, but "fundamentally, the way we look at it is that geology knows no political borders," Mr. Dey said, adding that all of CPPIB's investments take the same questions of cost structure, access to markets and returns into account in all locations.
The U.S. market currently has three key advantages for investors, Mr. Dey said. The first is the ease with which businesses can sell their oil and gas through developed infrastructure systems. The second advantage is the liquidity in the U.S. market where assets of a variety of sizes are trading hands quickly, helping investors find the right price. "And thirdly, there's great access to capital in that market, both on the equity and debt side … we just see a growing opportunity to acquire larger assets," Mr. Dey said.
Meanwhile, U.S.-based private-equity funds have exited several investments in the Canadian industry, joining global energy companies in seeking better returns elsewhere.
"Clearly there has been a sell-off of high-quality legacy assets in Canada by U.S. players," Mr. Dey said. "But the flip-side of that is that we've created a set of great Canadian companies buying great core legacy assets and consolidating that. So we don't in particular see a big Canada sell-off to go long U.S., especially when you really look at the types of assets we're selling in Canada."