Canadian Energy Exodus: The Real Story

Not so long ago, the Canadian oil and gas sector was on fire with the country’s massive and largely undeveloped resources the focus of acquisitions.

As the shale revolution in the lower 48 states progressed at breakneck speed, competition for acreage in the most prolific plays – the Eagle Ford, Bakken, Marcellus, and Permian Basin – heated up. However, the profitable deals were brokered by the early movers that bought assets at bargain prices compared to the late stage entrants that had to pay more. These companies then turned their attention to Canada’s huge reserves that could be obtained significantly cheaper than their U.S. counterparts.

Some large deals included China’s CNOOC Ltd.’s (CEO) $15 billion acquisition of Canadian energy explorer Nexen, Chevron Corp.’s (CVX) 50% stake buy in Kitimat LNG export project in the western Canadian province of British Columbia, and Malaysian state-owned energy firm Petronas’ takeover of Canada’s Progress Energy Resources.

But of late, a number of energy biggies have been divesting their Canadian assets.

Earlier this week, U.S. energy firm Apache Corp. (APA) announced the sale of its Western Canada oil and gas producing properties for a consideration of $374 million. Before that, Oklahoma City-based Devon Energy Corp. (DVN) agreed to unload certain liquids-rich natural gas properties – again in Western Canada – for C$3.125 billion.

And the U.S. energy companies are not alone in their Canadian exodus. Calgary, Alberta-headquartered Encana Corp. (ECA) is looking to sell its $1 billion worth Deep Panuke offshore natural gas project, while Canadian Natural Resources Ltd. (CNQ) was eager to divest a portion of its natural gas resources in British Columbia-based Montney Formation but backed out later, as it did not receive any suitable offer.

So, do all the exit news mean that investors should be skeptical about buying Canadian energy stocks? Not really, if we go to the very heart of the matter.

Let us note that most of the sale transactions involve low-return conventional gas-focused properties. In fact, most of the assets selling firms are maintaining their foothold in Canada, albeit with a different focus.

While Apache will keep all its rights in the liquids-rich Montney and other deeper horizons in the Wapiti area, Devon Energy has retained its Horn River assets in northern British Columbia and heavy oil properties in Alberta. The same can be said for Encana and Canadian Natural Resources, both of which are spending millions in other regions of Canada.

Therefore, to conclude, though it appears that energy companies are taking a flight out of Canada, a deeper analysis would reflect that the firms are just getting rid of non-core slow-growth assets in favor of acreage that they believe will give better returns over time.

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