Oil sands deals dive as state firms scrutinized

Oil-sands deals are getting done at the slowest pace in nine years as the Canadian government’s heightened scrutiny of investments by foreign state-owned companies hinders transactions.

Industry Canada officials are now vetting deals that don’t require approval under the nation’s foreign-takeover law, according to two people who have advised on transactions involving state-owned companies. Even foreign investors not usually deemed state owned are being asked to prove they aren’t controlled or influenced by government, including whether the state has the power to appoint directors, said another person familiar with the process. The people asked not to be identified as the details aren’t public.

The federal government is also probing more proposed acquisitions involving state-owned firms to see if they pose a threat to national security, said Julie Soloway, a partner at Blake, Cassels & Graydon LLP in Toronto.

“They are definitely digging deeper on these transactions,” Soloway said in a phone interview on Sept. 12.

Mergers and acquisitions in the oil sands fell this year to the lowest since 2004, data compiled by Bloomberg show. Smaller developers including Athabasca Oil Corp. (ATH) and BlackPearl Resources Inc. (PXX) are lagging behind peers after the government introduced rules to block state-owned buyers from purchasing oil-sands companies. Athabasca fell 22 percent since the rules were made public on Dec. 7, versus a 7.3 percent gain on the Standard & Poor’s/TSX Energy Index.

Additional Challenge

“You’ve had companies that have taken a step back and looked at what they can do and what they can’t do and I think a few transactions that were going to proceed have not proceeded because of this,” said George Gosbee, chief executive officer of AltaCorp Capital Inc., a Calgary-based investment bank.

The additional government scrutiny adds to challenges affecting Canadian energy stocks, including a slower economy in China and pipeline shortages that have helped push Canadian heavy crude prices to $31.20 a barrel below the U.S. benchmark. Spot prices for Western Canadian Select, the heavy grade, closed at $71.12 on Sept. 27, versus $102.32 for West Texas Intermediate, according to figures compiled by Bloomberg.

Canadian Imperial Bank of Commerce is examining whether the added scrutiny is contributing to a drop in investment by state-owned companies in a sector that depends on foreign cash, Jim Prentice, vice chairman of the bank and a former Canadian industry minister, said in Calgary.
‘Energy Superpower’

“It behooves us to look at this and to assess what the causes are and to make sure that, as a country, we’re careful,” Prentice said in an interview on Sept. 18.

Prime Minister Stephen Harper, who has called Canada an emerging “energy superpower,” is asserting control over the nation’s resources after about $51 billion in investments by state-owned firms in the Canadian oil and gas industry over the last seven years, according to data compiled by Bloomberg. The nation’s oil sands in Alberta are the world’s third largest source of crude reserves and the starting point for the proposed Keystone XL pipeline to the U.S. Gulf Coast.

Canada in December approved Cnooc Ltd. (883)’s $15.1 billion acquisition of Calgary producer Nexen Inc., and the C$5.2 billion ($5.05 billion) purchase of Progress Energy Resources Corp. by Petroliam Nasional Bhd., Malaysia’s state-owned energy company. At the same time, Harper said the government would permit further purchases of oil-sands businesses by state-owned enterprises only under “exceptional circumstances.”

‘Perfect Storm’

The government, which already vets foreign takeovers above C$344 million, also said it will “carefully monitor” deals involving state-owned enterprises in the world’s 11th-largest economy, and will “act to safeguard Canadian interests” when it appears that such acquisitions will “undermine the private sector orientation of an industry.”

The rules created a “perfect storm” to reduce deal activity in the oil sands, where stocks had already been dragged down by lower oil and gas prices, said Dan Cheng of Matco Financial Inc., who helps manage C$430 million from Calgary.

Canadian energy companies have underperformed U.S. peers by 25 percentage points on Standard & Poor’s indexes during the past five years, returning 6 percent compared with 31 percent for the U.S., according to figures compiled by Bloomberg.

TransCanada Corp. (TRP)’s $5.3 billion Keystone XL pipeline is in its sixth year of U.S. review, a delay that has led to pipeline bottlenecks. Economic growth in China, the world’s largest energy consumer, is projected by analysts to rise 7.6 percent in 2013, the lowest annual increase since a 7.6 percent expansion in 1999, data compiled by Bloomberg show.

Voting Rights

Now Industry Canada is reviewing transactions involving state-owned enterprises that fall below the C$344 million threshold that triggers an automatic review, according to two people familiar with discussions with the department.

All foreign investors are also now being asked a set of questions on state control, including whether a state owns a third or more of the investor’s voting rights and whether a government has the power to appoint managers and members of the company’s board, said one of the people familiar with the talks.

Industry Minister James Moore said foreign takeovers have been “elevated to a new degree of sensitivity” since the Nexen and Progress decisions.

“This is something that has greater attention than ever before, and we want to make sure that any decision is given the weight and consideration that it’s due and the department is allocating the resources and talent to these kinds of decisions,” Moore said in an interview last month at his Ottawa office.

Pipeline Venture

TransCanada and a unit of PetroChina Co. (857) said in October they would work together on a C$3 billion ($2.9 billion) oil pipeline through Alberta. After Harper announced the new foreign-takeover rules in December, the government asked the companies to halt the project while it examined the deal on national security grounds, said a person familiar with the issue.

The review surprised company officials, because the government initially welcomed the project, said the person, who asked not to be identified because the discussions aren’t public. The project didn’t involve oil-sands production and was a joint venture, not a takeover.

The pipeline is still on schedule, said Davis Sheremata, a TransCanada spokesman, declining to comment on discussions with governments. Mao Zefeng, a spokesman in Beijing for PetroChina, the publicly traded arm of state-owned China National Petroleum Corp., said by phone the company has no comment on the project.

Athabasca, BlackPearl

Industry Canada’s media relations office didn’t immediately respond to a request for comment on the department’s scrutiny of transactions involving state-owned enterprises, including the deal between TransCanada and PetroChina.

The C$751 million purchase by Exxon Mobil Corp. and Imperial Oil Ltd. of ConocoPhillips’ Clyden property in Alberta marked the first “significant” oil-sands transaction in 2013, according to a report this month by Peters & Co., a Calgary investment adviser. The deal activity compares with $16.1 billion in mergers and acquisitions involving the oil sands last year, including the Nexen takeover.

Investors betting on an Athabasca Oil takeover have left the stock, Andre De Leebeeck, a company spokesman, said in a phone interview.
BlackPearl has had similar share price declines to Athabasca, falling 35 percent since the rules were announced. John Festival, chief executive officer of the company, didn’t return a phone message seeking comment.

Seeking Clarity

Athabasca, which did two joint venture deals with PetroChina in the oil sands, has been seeking clarity for months on how the government defines control by a state-owned company to speed talks on potential new partnerships, De Leebeeck said.

Canada’s new foreign-takeover policies were more stringent than expected and have resulted in lower investment from state-owned companies even outside the oil sands, said John Brussa, vice chairman at Burnet, Duckworth & Palmer LLP in Calgary.

“That policy came a bit out of left field,” Brussa said. “It’s made the SOEs quite reticent to stick their toe in the water, generally,” he said, referring to state-owned enterprises.