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Foreign oil players make a bet that locals can turn it around

Shell’s Albian mine in Alberta.

Dieter Blum

Almost lost in the economic and political squabbling that followed Royal Dutch Shell PLC's sale of its oil sands assets to Canadian Natural Resources Ltd. was one of the deal's most telling aspects.

Shell is making a $4-billion bet on CNRL and its ability to thrive in a tough business as the Anglo-Dutch oil major retreats to work on chipping away at its sizable debt and focusing on quicker-return opportunities.

Part of CNRL's payment for the controlling stake in the Athabasca Oil Sands Project and a host of other assets is being made in shares, which essentially means Shell retains exposure to resources and equipment it has operated for years.

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If the buyer succeeds – and this one has made a business out of picking off out-of-favour assets and making a go of them – the seller keeps reaping rewards.

It's a new twist in oil patch deal-making that's becoming a craze. Assets are worth a lot less than they were in boom times and vendors are looking for ways to avoid locking in losses. Since the darkest days of the bust, investment bankers have said depressed and uncertain oil markets have kept a lid on merger and acquisition activity, opening up a gap between buyers' and sellers' views on value.

This helps narrow that nasty bid-ask spread.

It is Shell's second such transaction in Canada as it seeks to unload $30-billion (U.S.) of assets globally. In the process, one of the world's biggest oil companies is becoming a virtual portfolio manager of a Canadian energy-equity fund.

In October, Shell sold $1.4-billion (Canadian) of British Columbia and Alberta natural-gas properties to Tourmaline Oil Corp. There were a couple of fascinating story lines in that one. First, Tourmaline chief executive officer Mike Rose had sold Shell his former company, Duvernay Oil Corp., almost a decade earlier; the most recent deal included many of the same assets.

Also, Shell took about $400-million in Tourmaline stock as part of the payment, essentially plunking down a hefty wager on Mr. Rose, who like CNRL chairman Murray Edwards, has a reputation as a canny deal-maker, and has maintained it through the downturn.

It was Mr. Rose, who worked at Shell early in his career, who suggested the structure as the two sides were working through the transaction.

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When Shell and CNRL announced their $8.5-billion (U.S.) oil sands deal on March 9, debates erupted about the motivation. On one side, opponents of Alberta Premier Rachel Notley's New Democratic Party policies sent up flares, saying it showed how the province's taxation and environmental policies were driving global operators away.

On the other, the Notley government and its supporters touted the acquisition as a huge vote of confidence in the province's bitumen resources by a Canadian player that has grown in short order to become the largest among exploration and production companies. CNRL joins Suncor Energy Inc. and Imperial Oil Ltd./Exxon Mobil Corp. as the dominant players in oil sands mining.

Another big deal had similar attributes. That was Statoil ASA's sale of its oil sands assets to Calgary-based Athabasca Oil Corp., a deal worth up to $832-million (Canadian). As partial payment for that transaction, Norway's Statoil acquired 100 million Athabasca shares, giving it about a fifth interest and the opportunity to recoup some of the loss in book value following a purchase in good times, and sale after the market turned sour.

Of course, vendors of all of these properties would much rather that markets strengthen and they can go about selling assets for much more than they had paid in the first place, perhaps taking into account some of what they subsequently invested, too.

Indeed, the industry was supposed to be well into a recovery by now. But that case is looking weaker – crude has tumbled 12 per cent in less than three weeks, erasing all the gains made since late November.

Investors are turning away from energy shares as the outlook gets murkier. There appear to be some ready buyers, though, among rivals.

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