If you want to know who will be diners, and who will be dinner, in the coming round of consolidation in Alberta’s oil sands, all you need to do is check membership in Calgary’s least exclusive club.
Back in June, five of Canada’s largest energy companies launched an alliance called the Oil Sands Pathways to Net Zero. The group is investing in innovations such as carbon capture and bitumen processing technology to achieve net-zero greenhouse gas emissions from their properties by 2050.
To join the club, chief executive officers simply had to publicly commit to spend what it takes to responsibly develop one of the largest fossil fuel reserves on the planet. Canadian Natural Resources , Suncor Energy , Cenovus Energy , Imperial Oil and MEG Energy stepped up from the start. In November, ConocoPhillips joined the group.
Notable by their absence from this list are a handful of global energy companies with long-standing ties to the oil sands as minority partners in projects run by Pathways alliance members. Right now, players such as California-based Chevron, Europe’s Total, BP, Shell, and China’s CNOOC and Sinopec are out of the club.
The decision to snub the Pathways partnership is the latest sign of what’s long been expected in the energy sector – an Alberta exit by the majority of foreign investors in the oil sands. In a recent report, a team of analysts at RBC Capital Markets said: “Given the ESG – and mainly E – headwinds that continue to blow across oil sands investments, a further exodus of international oil companies from Canada is conceivable.”
Investors would applaud oil sands consolidation, as RBC’s analysts pointed out that any of the potential multibillion-dollar deals between owners of projects “carries no integration risk and is tantamount to a common share buyback.”
Raising cash for acquisitions is not an issue, as the recent rise in oil and gas prices strengthened potential buyers’ balance sheets. Collectively, the five founding companies in the Pathways club are expected to generate about $33-billion of free cash flow next year – that’s money left over after paying dividends and investing in operations, according to RBC. Canadian Natural, led by billionaire co-founder Murray Edwards, will account for $10.5-billion of that total.
What’s holding back deals? As always, it’s price.
Mr. Edwards built Canadian Natural by acquiring properties at bargain valuations during downturns in the energy markets. He’s the only buyer for Chevron’s 20-per-cent stake in the Athabasca oil sands project and Shell’s 10-per-cent holding – Canadian Natural operates the property and owns a 70-per-cent share.
In recent months, Chevron and Shell jacked up the valuations they place on their Athabasca stakes to reflect rising commodity prices, according to bankers and energy analysts. Mr. Edwards is willing to wait and let those ESG headwinds blow, as activist investors put pressure on energy companies headquartered in jurisdictions such as Europe and California to exit the oil sands, even if they take a haircut on the deal.
We’ve seen a steady stream of sophisticated, long-term institutional investors sell Canadian energy properties because of heightened ESG awareness. In September, the Caisse de dépôt et placement du Québec said it will sell its oil production investments by the end of next year as part of its climate strategy.
In November, Heritage Royalty, a Calgary-based company owned by the Ontario Teachers Pension Plan, sold a 1.9-million acre land package to PrairieSky Royalty Ltd. for $728-million. That’s a reversal from the Ontario Teachers strategy six years ago, when Heritage Royalty paid $3.3-billion to acquire a 4.8-million acre portfolio from Cenovus.
Institutional investors such as the Caisse and Teachers have considerable influence in boardrooms. An energy company needs an ESG-friendly approach to the oil sands, such as the Pathways alliance, or it will face pressure to divest these assets.
The power dynamic in Alberta’s oil sands is now clear. On one side of the table, you have six cash-rich energy companies pledging they will work together and use science to tap long-life properties in an environmentally responsible manner. On the other side are global companies under increasing pressure to quit the sector.
For patient investors such as Mr. Edwards and peers at Suncor, Imperial, Cenovus, MEG and ConocoPhillips, this is a once-in-a-lifetime opportunity to bulk up the oil sands.
Can green investing save the planet?
A new 5-part newsletter course for the climate-conscious investor. Taking the course? Tag us on Twitter (@globeandmail) using the hashtag #GlobeGreenInvesting.