In a blast of A&D activity, March delivered $24.3 billion in deals with one thing in common—major exits from Canadian oil sands.
By comparison, in 2016 all A&D value in the Delaware Basin totaled roughly $20 billion.
The latest defector, ConocoPhillips (NYSE: COP) said March 29 that it would sell assets and interests in Canada for $13.3 billion in cash and equity—or roughly 17% of the company’s enterprise value.
ConocoPhillips sold off 18% of its forecast production–280,000 barrels of oil equivalent per day—and the market loved it. The company’s share price closed up 8.8%, adding $5 billion to its market cap, Wood Mackenzie said.
ConocoPhillips’ deal—the largest E&P transaction since Shell purchased BG Group two years ago—is part of a larger exodus, Pavel Molchanov, an analyst at Raymond James, said in a March 30 report.
“Non-Canadian companies are exiting the oil sands one after the other,” he said.
Royal Dutch Shell Plc (NYSE: RDS.A) said it would divest most of its Canadian oil sands assets for $8.5 billion. And on March 9, Marathon Oil Corp. (NYSE: MRO) bowed out with a $2.5 billion divestiture.
Control of the oil sands has swung dramatically to Canadian producers, though no single factor appears to have motivated the deals in 2017—or last year’s divestments by Statoil ASA (NYSE: STO) and Murphy Oil Corp. (NYSE: MUR) that totaled about $1.3 billion. A combination of investments, taxes and reshuffling investment cycles is making its way through Canada.
“There is clearly a trend here, though it would be wrong to conclude that all companies are doing it for the same reason,” Molchanov said. “One dynamic at work is likely Alberta’s new carbon tax, which took effect in January at CA$20/ton and is set to increase to CA$30/ton in 2018.”
Molchanov said that ConocoPhillips “emphatically stated that the carbon tax was not a consideration for this deal, but we think some other companies took a different view.”
Stephen Kallir, an analyst who covers Canada upstream oil and gas for Wood Mackenzie, said in an email a variety of reasons are causing departures. ConocoPhillips’ sale was portfolio rebalancing toward “lower cost sources of production” that provide it with the side benefit of reducing debt.
“Shell was a bit more debt-driven, due to their disposal target, but it still reflected a shift toward lower-cost sources of production,” he said.
Marathon’s exit, marking a shift to the Permian Basin, also reflects how companies are viewing investments. Marathon said in March it would purchase 90,000 net Permian acres.
Tight oil offers faster returns and less risk from oil price volatility, though Kallir said shale plays carry “higher reservoir and development risks” than oil sands projects.”
“This means that a lower discount rate for oil sands projects could be appropriate,” he said.
Molchanov noted in a March 9 report that Marathon would lose cash flow by selling its Canadian assets.
“While there is no escaping the fact that the loss of this cash flow will be near-term dilutive, the 25% reduction in production costs [in effect setting aside the high-cost oil sands barrels] is cushioning the impact,” he said.
After the A&D winds die down, ownership of oil sands production will be firmly in the hands of Canadian producers. Wood Mackenzie estimates that 70% of production will be divided among four Canadian producers: Suncor Energy Inc. (NYSE: SU), Canadian Natural Resources Ltd. (NYSE: CNQ), Imperial Oil Ltd. (AMEX: IMO) and Cenovus Energy Inc. (NYSE: CVE).
Further oil sands deals are possible, but A&D will be less than $5 billion, Wood Mackenzie said in an April report.
“There are a handful of potential selldowns or exits that could move ahead from the pool of non-operating interest holders,” the report said. “We continue to believe the oil sands portfolio reshuffling of 2015-2017 is driven by global sellers reorienting towards lower cost sources of production and finding receptive consolidators in Canadian-domiciled firms.
“It is important to note that we do not see these as basement prices, often with premiums being paid above our base case valuations,” the report said.
Darren Barbee can be reached at dbarbee@hartenergy.com.
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