Canada's oil sands mergers get painfully pricey
CALGARY/NEW YORK (Reuters) - Fat wallets and limited opportunities elsewhere may continue to push acquisitions in Canada's oil sands region, analysts say, though soaring costs may leave the sector open to only the very biggest companies.
Earlier this week U.S. refiner Marathon Oil Corp. (MRO.N) agreed to pay $5.56 billion for Western Oil Sands Ltd. WTO.TO, an eight-year old firm whose only operating asset is a 20 percent stake in the Athabasca Oil Sands Project run by Royal Dutch Shell (RDSa.L).
The agreement is the latest in a series of big-ticket deals that have extended the reach of some of the globe's biggest oil and gas players into the muskeg and forests of northern Alberta, where an estimated 174 billion barrels of oil lie trapped in sand, a resource second only to Saudi Arabia's.
"Producers are flush with cash and their opportunities globally are getting slimmer because their access to resources is getting cut off in other countries," said Andrew Potter, an analyst with UBS Securities. "That makes the oil sands look pretty compelling."
More than C$17 billion ($16.2 billion) in deals has been announced or wrapped up so far in 2007. The region is attracting new entrants like Marathon, and Norway's Statoil (STL.OL), which paid nearly $2 billion for an early-stage oil sands venture earlier this year.
Other mergers closed this year include a joint-venture partnership that combined some of EnCana Corp.'s (ECA.TO) oil sands properties with two ConocoPhillips (COP.N) refineries in the United States and Shell's C$8.7 billion buyout of the minority stake in its Canadian unit.
But with those deals, analysts say good properties are getting much harder to find and more expensive to either acquire or develop.
"There isn't much left there for assets," says Kyle Preston, an analyst with Salman Partners.
The only company openly up for grabs is Synenco Energy Inc. SYN.TO, a small firm planning an oil sands mine and upgrader to convert the tar-like bitumen stripped from the sand into refinery ready crude.
Synenco, with a market capitalization of about C$746 million, owns a 60 percent stake in the Northern Lights project. China's Sinopec (0386.HK) holds the remainder. But any buyer will need deep pockets. Synenco put itself up for sale in May after the budgeted cost for Northern Lights more than doubled to C$10.7 billion.
Indeed, the latest two projects to be announced in the region are Petro-Canada's PCA.TO C$26 billion Fort Hills project and a 400,000 barrel-a-day upgrading complex planned by Shell that could cost C$27 billion
The massive scale needed to justify an investment in the region means the next wave of buyers of oil sands assets may be large, integrated oil and gas companies, energy bankers said.
With deep pockets and easy access to low-cost capital, the biggest firms are best able to handle the high costs of construction, operations and labor in the region, the bankers said, but they will have to get past some roadblocks.
Finding large, high-quality assets may be difficult because many, such as the Shell-operated Athabasca project in which Western has a 20 percent stake, are already controlled and operated by the large integrated companies themselves.
"I think people have pored over the region pretty extensively," one energy banker said.
Valuations are high and the biggest players -- like No. 2 producer Suncor Energy Inc. (SU.TO), with a stock-market value of more than C$44 billion -- are likely too expensive for all but the biggest companies to acquire.
But while a big-ticket deal is considered unlikely, it's not out of the question.
"Anything can be sold," said Mark Friesen, an analyst with Calgary-based FirstEnergy Capital. "But there's nothing the market is expecting at the moment. Expectations are pretty quiet right now."
