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Consolidation in Canada’s Oil Sands

By Roger S. Conrad on Mar. 24, 2017

The deal flow has come fast and furious of late in Canada’s oil sands.

Statoil (Oslo: STL, NYSE: STO) completed the sale of its assets in the region to Athabasca Oil Corp TSX: ATH) for CA$435 million in cash, 100 million common shares (almost 20 percent of the Alberta-based company’s float) and four years of contingent value payments.

Earlier this month, Royal Dutch Shell (LSE: RDSA, NYSE: RDS.A) likewise pulled up stakes in Alberta, announcing a series of transactions to sell all its in-situ and undeveloped oil sands interest and reduce its ownership share of the Athabasca Oil Sands Project to 10 percent from 60 percent.

Although these international oil companies have monetized their assets in Canada’s oil sands, local operators have revived under-development projects that were paused at the height of the down-cycle.

Suncor Energy (TSX: SU, NYSE: SU), for example, plans to produce first oil from the Fort Hills project in the fourth quarter of 2017 and expects output from this site to increase to 194,000 barrels per day next year. All told, operators have about a dozen thermal oil projects—approved during the bull market—that will come onstream over the next several years, driving production growth.

Recent deal-making has also concentrated ownership in the oil sands, with Suncor Energy and Canadian Natural Resources (TSX: CNQ, NYSE: CNQ) expanding their footprints significantly. These companies and Cenovus Energy (TSX: CVE, NYSE: CVE) are survivors, though their prospects for volumetric growth are well-understood because of the long lead times on these projects.

In addition to superior economies of scale, these companies’ price realizations could benefit from the start-up of at least two and possibly three major oil pipelines that will provide much-needed takeaway capacity and access to international markets.

The approval of these pipelines stem, in large part, from the governing New Democratic Party’s (NDP) efforts to make nice with neighboring provinces and the federal government on environmental issues.

When the Conservative Party dominated Alberta politics, the rest of the country treated the province like a pariah because of its refusal to accept responsibility for the environmental challenges caused by oil-sands production.

The NDP’s Climate Leadership Plan—which includes a carbon tax, a plan to phase out Alberta’s coal-fired power plants and expand wind-power capacity—has made federal regulators more amenable to supporting the much-needed Line 3, Keystone XL and TransMountain pipelines.

All these projects won’t come onstream for several years, assuming that their backers make their final investment decisions and construction progresses as planned

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    • Elliott H. Gue

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Roger S. Conrad

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor