Sunday, December 19, 2021

Opinion: Deals in the oil sands are coming, as Canada’s biggest energy companies put cash and science to work


Giant dump trucks haul raw tar sand at the Suncor tar sand mining operations near Fort McMurray, Alta.Todd Corroll/Reuters

If you want to know who will be having dinner, and who will have dinner, in the coming round of consolidation in Alberta’s oil sands, all you need to do is check for membership in at least one of Calgary’s exclusive clubs.

Back in June, five of Canada’s largest energy companies launched an alliance called the Oil Sands Pathway to Net Zero. The group is investing in innovations such as carbon capture and bitumen processing technology to achieve net-zero greenhouse gas emissions from its properties by 2050.

To join the club, CEOs had to publicly commit to spending to responsibly develop one of the largest fossil fuel reserves on the planet. Canadian Natural Resources, Suncor Energy, Cenovus Energy, Imperial Oil and MEG Energy stepped up from the start. In November, ConocoPhillips joined the group.

Notably due to their absence from this list are some global energy companies, which have long been associated with oil sands as minority partners in projects run by members of the Pathway Alliance. Right now, players such as California-based Chevron, Europe’s Total, BP, Shell and China’s CNOOC and Sinopec are out of the club.


The decision to turn down the Pathway partnership is the latest sign of a long-expected move in the energy sector – an exit from Alberta by most foreign investors in the oil sands. In a recent report, a team of analysts from RBC Capital Markets said: “Given the ESG – and primarily E – headwinds that continue to blow into oil sands investments, there is a need for a further exodus of international oil companies from Canada.” can be imagined.”

Investors will appreciate the oil sands consolidation, as analysts at RBC pointed out that any potential multi-billion dollar deal between the owners of the projects “has no consolidation risk and is similar to an ordinary share buyback.”

Raising cash for the acquisition is not an issue, as the recent rise in oil and gas prices has strengthened the balance sheets of potential buyers. Collectively, the five founding companies in Pathways Club are expected to generate about $33 billion in free cash flow next year — money left over after paying dividends and investing in operations, according to RBC. Canadian Natural, led by billionaire co-founder Murray Edwards, will have $10.5-billion of that total.

Mr. Edwards built Canadian Natural by acquiring assets at bargain valuations during a downturn in energy markets. He is the sole buyer for Chevron’s 20-percent stake in the Athabasca oil sands project and Shell’s 10-percent stake — Canadian Naturals operates assets and owns a 70 percent stake.


According to bankers and energy analysts, in recent months, Chevron and Shell have raised the valuations placed on their Athabasca stakes. Mr Edwards is ready to wait and let those ESG headwinds fly, as active investors pressure energy companies headquartered in Europe and jurisdictions such as California to exit the oil sands, even if they get a haircut on the deal.

We have seen a steady stream of sophisticated, long-term institutional investors sell Canadian energy assets due to ESG awareness. In September, Caisse de dépôt et Placement du Québec said it would sell its oil production investments by the end of next year as part of its climate strategy.

In November, Heritage Royalty, a Calgary-based company owned by the Ontario Teachers Pension Plan, sold a 1.9-million-acre land package to PrairieSky Royalty Ltd. for $728-million. This is in contrast to the Ontario Teachers strategy six years ago, when Heritage Royalties paid $3.3 billion to acquire a 4.8 million-acre portfolio from Cenovus.


Institutional investors such as How and Educator have considerable influence in the boardroom. An energy company that needs an ESG-friendly approach to oil sands, such as the Pathway Alliance, or will face pressure to sell these assets.

The dynamic power is now evident in Alberta’s oil sands. On one side of the table, you have six cash-rich energy companies that pledge that they will work together and use science to tap longer life properties in environmentally responsible ways. On the other hand, global companies are increasing pressure to leave the sector.

For patient investors like Mr. Edwards and peers from Suncor, Imperial, Cenovus, MEG and ConocoPhillips, this is a once-in-a-lifetime opportunity to grow the oil sands.


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