Canadian Energy Companies Sell 'Jewels' To Keep Oil Sands Afloat

Reuters

CALGARY, Alberta, Feb 9 (Reuters) – Faced with record low prices for heavy crude, Canadian energy companies are sacrificing other parts of their business to keep higher-cost oil sands production going and safeguard the billions already invested in these multi-decade projects.

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 as they forge ahead with oil sands projects that are in many cases bleeding money on every barrel.

Although the move to support higher-cost production seems counterintuitive, oil sands companies take a longer-term view that shutting plants in Alberta would be very expensive 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 eventually recover. The latest Reuters poll of oil analysts forecasts the U.S. benchmark will average $41 a barrel in 2016, a level where most Canadian oil sands projects can break even.

Bankers say the need to bolster balance sheets and cover oil sands losses will boost the number of Canadian energy deals this year, particularly sales of pipelines, and storage and processing facilities.

"The market was down significantly last year in terms of energy M&A, and we think that's going to reverse," said Grant Kernaghan, Canadian Investment Banking head for Citigroup.

Core Business

MEG is selling its 50 percent stake in the Access pipeline, which analysts value at around C$1.5 billion ($1.08 billion), while Husky is selling a package including 55,000 barrels of oil equivalent per day of oil and natural gas production, royalties and midstream facilities, valued at between C$2.4 billion to C$3.2 billion.

According to a recent TD Securities report, virtually no oil sands projects can cover overall costs, including production, transportation, royalties, and sustaining capital, with U.S. benchmark crude below $30 a barrel.

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

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

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

Oil sands "remains our core business so we will look to various other handles we have to support that business," said Brad Bellows, a spokesman for MEG.


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