Keystone wait weighs on smaller oil producers

Growth prospects for smaller oil-sands producers including BlackPearl Resources Inc. (PXX) and Southern Pacific Resource Corp. (STP) are fading as political wrangling over the Keystone XL pipeline and rising U.S. supply slow deals in the Canadian energy industry.

The inability of firms such as Marathon Oil Corp. (MRO), ConocoPhillips (COP), and Koch Industries Inc. to sell assets recently highlights waning investor interest in Alberta’s oil sands, dragging down shares of smaller producers, said Mike Dunn, an analyst with FirstEnergy Capital Corp. in Calgary.

Smaller companies are especially vulnerable to slowing deal-making because their valuations are based in part on the chance that they will be bought, said Mason Granger, a portfolio manager at Sentry Investments Inc. in Toronto. The Keystone XL delay makes it more difficult for them to raise money for financing to grow and maybe ultimately to survive, Granger said.

“Oil sands is just such a tough space to be in — it really requires the balance sheet of the super majors to make a success,” Granger, who manages C$400 million ($386 million) in energy sector investments, said in a May 24 telephone interview. “The landscape of junior oil-sands companies is littered with spectacular failures.”

John Festival, chief executive officer at BlackPearl, didn’t return messages seeking comment on funding after saying in a May 8 earnings release the company was working on a financing plan. Greg Foofat, a Southern Pacific spokesman, said the company has received a boost to its revolving credit facility to fund operations.

Keystone Conduit

Competition from rising U.S. energy supplies, a dearth of capacity to ship crude out of landlocked Alberta and political deliberations around pipelines have pushed oil from Canada, home to the world’s third-largest reserves, swinging to as much as $41.50 a barrel below the main U.S. crude. The gap was $19.35 below U.S. crude yesterday.

U.S. President Barack Obama said he would decide on the $5.3 billion Keystone XL conduit from Alberta’s oil sands to the U.S. Gulf Coast this year, North Dakota Senator and Keystone XL supporter John Hoeven, a Republican, said in March, after a meeting with the president and other Republican lawmakers. TransCanada Corp., builder of the proposed Keystone XL, has faced pressure from environmental groups such as who say oil-sands operations release more carbon dioxide than other forms of conventional drilling.

Marathon, based in Houston, said last week it ended talks to sell its 20 percent stake in the Athabasca Oil Sands Project mine in northern Alberta after failing to reach an agreement with a potential buyer. Lee Warren, a Marathon spokeswoman, declined to provide further detail on why talks broke down, in a telephone interview yesterday from Houston.

Data Point

ConocoPhillips said in April its oil-sands asset sales may be delayed until next year. Davy Kong, a company spokeswoman, said in a May 28 e-mail the company still plans to sell six oil-sands assets and has engaged investment bank Scotia Waterous. Kong said the company has received “significant interest” in the assets.

Murphy Oil Corp. (MUR) earlier this year abandoned an attempt to sell a stake in the Syncrude oil sands project and Koch put six properties up for sale last summer but didn’t sell them all. The company “elected to retain the balance for further development,” Paul Baltzer, a Koch spokesman, said in an e-mail.

The end of Marathon’s sale talks is “another data point that supports the view that the market for these assets today is not what it used to be,” Dunn at FirstEnergy said in a May 24 phone interview. “Stock prices of the smaller oil-sands players that in the past might have been seen as take-out candidates are all down considerably.”

Cash Flow

Canadian exploration and production companies valued from C$100 million to C$1 billion have declined 3.1 percent on average this year, compared with a 4.1 percent increase in the broader S&P/TSX Composite Energy Sector Index. Companies of this size have enough cash to last 2.96 months, the median multiple among 32 Canadian oil and gas producers with data available, according to figures compiled by Bloomberg. That compares with 6.24 months a year earlier.

Granger said oil-sands producers such as Calgary-based BlackPearl and Southern Pacific, will probably have a difficult time raising money in today’s environment. He said he prefers investments in bigger producers like Canadian Natural Resources Ltd. (CNQ), which generate their own cash flow to fund growth and will benefit later this year and next if new pipelines including Keystone XL are approved.

Revolving Credit

BlackPearl is planning to produce 20,000 barrels per day from its Blackrod project, which it expects to get regulatory approval by next year. The company’s stock has fallen 27 percent this year in Toronto trading.

“Over the last few months the most often asked question from our shareholders and potential investors is how are we going to fund these projects,” CEO Festival said in the earnings statement. The company is working on a financing plan that it will announce in the next couple months, he said.

Southern Pacific, down 60 percent this year in Toronto, boosted its revolving credit facility to C$100 million from C$75 million this month and is using that to fund operations as it ramps up its McKay project, Foofat said in a phone interview yesterday.

The company doesn’t plan to raise additional equity or debt and is on track to reach full production of 12,000 barrels a day by April, he said.

“In this environment for us to get an increase to C$100M shows the banks have a lot of confidence in our assets and our ability to ramp up,” Foofat said.

Foreign Investment

Rules introduced by the Canadian government last year that bar state-controlled companies acquiring controlling interests in oil-sands projects, except in “exceptional circumstances,” also are having an effect, Dunn at FirstEnergy said. The guidelines followed Cnooc Ltd.’s $15.1 billion takeover of Calgary-based Nexen Inc. last year.

“The list of potential buyers may have been shrunk by the clarification to the Investment Canada Act last December,” Dunn said.
Lower margins are weighing on the valuation of oil-sands investments this year, Mike Tims, co-chairman of Calgary investment bank Peters & Co., said in an interview May 24.

Margins for an average oil-sands producer using steam-injection drilling shrank by 50 percent or more in the first quarter, to $5 to $20 a barrel from mid-2012, according to a Peters research report published in January. The bank’s estimate of the market value of undeveloped steam-injection oil-sands assets has dropped by more than 50 percent to 75 cents a barrel from $2 a barrel in 2008.

Reduced Spending

A negative decision on the Keystone XL pipeline would reduce spending on oil-sands projects by about C$9.4 billion between 2014 and 2017, RBC Capital Markets analyst Dan MacDonald wrote in a note to clients May 27.

“The uncertainties are unresolved and the costs have continued to go up,” Tims said. “It may start to impact new investment decisions in projects and it will also impact investors’ thinking about putting new capital in this sector.”