Canada oil sands champions face investment challenge

Growing consolidation of Canada's oil sands assets in the hands of local oil firms is raising questions over future investment in the sector.

The withdrawal this year of a number of large foreign operators from the country's oil sands is casting doubt over the industry's appeal. Shell, Norway's state-controlled Statoil and US independent ConocoPhillips largely cashed out of the sector in asset deals worth a combined total of more than $20bn in December 2016-March, selling 420,000 b/d of production and billions of barrels in proven reserves. The growing consolidation of assets among Canadian companies is leading some to refocus their strategies in ways that are welcomed by investors. But one firm, Cenovus Energy, is under pressure, after piling on debt to buy $13.2bn worth of assets from ConocoPhillips.

Cenovus, like its similarly acquisitive peers Suncor and Canadian Natural Resources (CNRL), is reinforcing its focus on familiar oil sands assets, by purchasing the remaining interests in its Foster Creek and Christina Lake in-situ projects. But Cenovus' share price has fallen by 48pc since it unveiled the deal in March, sharply underperforming against the other firms (see chart). Chief executive Brian Ferguson has unexpectedly announced plans to retire at the end of October.

The Cenovus deal includes liquids-rich assets in the Montney and Duvernay shales, which some investors complain is new territory for the firm. It now plans up to C$5bn ($4bn) worth of disposals to restore the strength of its balance sheet. But another large divestment looks unlikely, as Cenovus may struggle to find a single buyer for diverse assets totalling 112,000 b/d of oil equivalent. These are more likely to be sold off piecemeal to firms that have specialisms in specific fields. CNRL and Cenovus are neighbours in the Pelican Lake area — another 20,000 b/d of heavy output could be a good fit for CNRL, for the right price.

Suncor has enjoyed a "first mover advantage" in the consolidation since the start of 2016, building up a 54pc stake in the 350,000 b/d Syncrude consortium. It acquired 37pc through its $6.6bn purchase of Canadian Oil Sands, and 5pc from Murphy Oil for $700mn. The firm will continue to look for organic growth, as it has a slew of proposed projects to choose from. But it has not ruled out another counter-cyclical acquisition while oil prices remain under pressure. This could include expanding its interest in Syncrude, the company says.

Cenovus' balance sheet pressures have prompted it to defer investment decisions on Foster Creek phase H and Narrows Lake phase A. Both projects were originally targeted for start-up this year. The postponements reflect a wider slowdown in new oil sands investment decisions. A typical in-situ oil sands development still requires the equivalent of a $60/bl benchmark WTI price to offer a 10pc return on investment, including transport and blending costs, Canadian energy research institute Ceri estimates.

But producers association Capp expects the Canadian crude market to grow by 5pc/yr to 2020, before the slowdown in project approvals weighs on production growth. Debottlenecking and maximising existing assets will continue to be popular as capital remains constrained. CNRL plans to add a further 80,000 b/d of light synthetic crude oil to its Horizon mining operation, and average $26-29/bl in operating costs. The costs were $10/bl higher in 2015.

Capp is optimistic about Canada's longer-term growth prospects. It forecasts oil sands output to climb to nearly 3.7mn b/d in 2030 — up from 2.4mn b/d last year — underpinning an overall increase in domestic oil production to more than 5mn b/d.

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