Canadian energy companies selling off ‘jewels in the crown’ to keep oilsands operations afloat

CALGARY – Faced with record affordable prices for heavy crude, Canadian energy information mill sacrificing other parts of the business to help keep higher-cost oilsands production going and safeguard the billions already committed to these multi-decade projects.

No living large for oil majors as even they take a savage beating from fall in crude prices

Integrated oil companies for example Imperial Oil Ltd., its parent Exxon Mobil Corp., and BP PLC are made to be resilient to market downturns, thanks largely to downstream operations that offset upstream woes. But Tuesday’s fourth-quarter results show even they’re taking a savage beating from the fall in prices C in Canada, Imperial collected less than $23 a barrel for its bitumen during the period – and that they are moving forward with extreme care in 2016.

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Companies including Husky Energy Inc, MEG Energy Corp and Pengrowth Energy Corp are selling assets or slowing light and conventional oil exploration and production, even while they forge ahead with oilsands projects that are oftentimes bleeding money on every barrel.

Although the proceed to support higher-cost production seems counterintuitive, oilsands companies have a longer-term view that shutting plants in Alberta would be very costly and risk permanently damaging carefully engineered reservoirs, underground deposits of millions of barrels of tarry bitumen.

It is easier, and cheaper, to shut down and later restart conventional wells.

Producers are also betting that oil prices will ultimately recover. The latest Reuters poll of oil analysts forecasts the U.S. benchmark will average US$41 a barrel in 2016, a level where most Canadian oilsands projects can break even.

Bankers the have to bolster balance sheets and cover oilsands losses will raise the quantity of Canadian energy deals this year, particularly sales of pipelines, and storage and processing facilities.

“The market was down significantly this past year in terms of energy M&A, and we think that’s going to reverse,” said Grant Kernaghan, Canadian Investment Banking go to Citigroup.

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CORE BUSINESS

MEG is selling its Half stake in the Access pipeline, which analysts value around $1.5 billion, while Husky is selling a bundle including 55,000 barrels of oil equivalent each day of oil and gas production, royalties and midstream facilities, worth between $2.4 billion to $3.2 billion.

According to a recent TD Securities report, virtually no oilsands projects can cover immediate and ongoing expenses, including production, transportation, royalties, and sustaining capital, with U.S. benchmark crude below US$30 a barrel.

The benchmark heavy Canadian blend, Western Canada Select (WCS), now trades around US$16.30 a barrel, just a couple dollars above record lows hit in January.

But as nearly 80 percent of oilsands cost is fixed investments, such as equipment for injecting high-pressure steam underground to liquefy tarry bitumen, producers prefer to possess some revenue coming in to assist offset those costs than none, said FirstEnergy Capital analyst Mike Dunn.

To be sure, if WCS prices dropped even more to below US$12 a barrel, Dunn said producers may take a look at methods to trim production by 10-30 percent.

Oilsands “remains our core business therefore we will look to various other handles we must support that business,” said Brad Bellows, a spokesman for MEG.

Even because it makes major cuts, Husky is ramping up new thermal projects, including its Sunrise partnership with BP. Sunrise in northern Alberta took three years and $2.5 billion to construct and Husky is incorporated in the midst from the two-year process of raising reservoir pressure to full production capacity. Then, Sunrise is expected to create for 40 years.

As along with selling assets, some players, such as Canadian Natural Resources Ltd and Baytex Energy are shutting in uneconomic conventional heavy oil wells, but leaving their oilsands operations intact.

JEWELS Within the CROWN

Bankers say that midstream assets – pipelines, storage and processing facilities – prove well-liked by buyers for example pension funds and private equity firms, which favour investments with stable cash flows that are relatively easy to value.

“They’re to a certain extent the jewels in the crown. These companies wouldn’t be seeking to sell them when they might get away without doing the work,” said Citi’s Kernaghan.

Last year, oilsands producer Cenovus Energy sold a portfolio of gas and oil royalty properties to Ontario Teachers’ Pension Plan for $3.3 billion.

Industry veterans note oilsands operations also needed to be “cross-subsidized” by healthier areas of the business during the last prolonged market slump within the 1980s and predicted producers would push to keep operating until prices recover.

? Thomson Reuters 2016