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Why Talisman Energy Inc is the first — but not last — victim of the oil price slump

Claudia Cattaneo
Tuesday, Dec. 16, 2014

Senior oil and gas producer Talisman Energy Inc. became the first Canadian oil patch company to surrender to the global oil price crash Tuesday, when it announced its sale to Spain’s Repsol SA for US$8.3 billion in cash after a long campaign to re-focus its global business.

There will be more.

With share prices at garage-sale levels, the whole Canadian energy sector is vulnerable to being picked on by anyone with a war chest, expectations of an oil price recovery or better ideas on how to create value.

“The likelihood for high-profile M&A transactions is almost a guarantee,” said Sonny Mottahed, CEO and managing partner of Black Spruce Merchant Capital in Calgary. “In the environment that we are in today, where you have equity prices reacting dramatically to the drop in the commodity … the intrinsic value of a lot of these companies is far greater than what the market is valuing them at.”

In anticipation of more consolidation, investors pushed up many battered Canadian energy names, with Encana Corp. bouncing 7.4% to close at $14.53, Crescent Point Energy Corp. gaining 10% to close at $24.13; Baytex Energy Corp. gaining 5.7% to $16.21, and Whitecap Resources Inc. gaining 5.4% to $10.99.

Talisman interim president and CEO Hal Kvisle said weak oil prices made it difficult for the company to continue as an independent.

“This transaction mitigates the risk associated with executing on a plan as a going concern,” he said in an early morning conference call to discuss the deal.

Talisman is facing “a very stressed oil price environment,” limited ability to reduce costs, difficulties selling assets, having to raise equity to shore up a debt-heavy balance sheet, he said.

In addition, the company failed to find a replacement for Mr. Kvisle, a director and former CEO of TransCanada Corp. who came out of retirement to temporarily lead the company but wanted to step down by the end of December.

The call lasted a mere 12-minutes and generated no questions — hardly the end one would have expected for a company that was once one of Canada’s most aggressive and that took more than 20 years to build.

The takeover, which also includes the assumption of $5-billion in debt, values the senior company at about a third of what it was worth in the market in 2011, though the offer price represents a 60% premium to the 30-day average price of its stock, when Canadian energy stocks followed oil prices downward in a war for market share started by Saudi Arabia.

Repsol is paying a full and fair price, Brendan Warn, an analyst at BMO Capital Markets in London, told Bloomberg.

But “If oil had stayed above US±$100, the deal may not have happened as Talisman would have ploughed on,” he said.

Bryan Gould, the president and CEO of Calgary-based acquisition-minded Aspenleaf Energy Ltd., said companies with high debt, low market credibility, lack of access to capital and high dividends are getting squeezed.

“There are companies that have good assets, but in this environment, depending on how long low prices play out, it becomes very challenging,” said Mr. Gould, whose company has just made an offer to purchase private producer Coral Hill Energy Ltd. and is looking for more.

As oil prices keep falling, weak companies “start to question whether there is a light at the end of the tunnel and how far out it is,” he said. “Yes, maybe there is great upside and greater value, but it’s a long ways off and there are a lot of hurdles here and there. I think you are going to see a lot of consolidation and a lot of companies disappear.”

Aspen, run by former executives of the Canadian subsidiary of Royal Dutch Shell PLC, has more than $350-million from Arc Financial Corp. and Ontario Teachers Pension Plan available for purchases.

Potential buyers include other pension plans that are making direct investments in the oil business, as well as strong multinationals like Norway’s Statoil ASA. Canada Pension Plan Investment Board, which was reportedly looking at buying Talisman, and other bidders that were also considered, may now move on to other targets.

Athabasca Oil Corp., Penn West Petroleum Ltd., Lightstream Resources Ltd., Legacy Oil & Gas Inc. are among names that are seen as vulnerable.

The takeover of Talisman by the Spanish company deprives Canada of yet another major corporate head office after many foreign acquisitions.

It also shrinks the number of major oil and gas producers that still make decisions in Canada. They are: Canadian Natural Resources Ltd., Suncor Energy Inc., Cenovus Energy Inc. and Encana Corp.

But it’s unlikely the federal government would block it under the Investment Canada Act.

Stephen Harper’s Conservative government tightened foreign takeover rules in 2012 after the takeover of Nexen Inc. — a Talisman lookalike — in 2012 by China’s CNOOC Ltd., restricting further takeovers by state owned enterprises in the oil sands.

But Talisman doesn’t have oil sands operations — indeed, much of its production is outside Canada — and Repsol is not owned by the government of Spain. Canada’s best hope is that Repsol proves to be good operator.

“We agree we have [acquired] a magnificent machine and we would like to give you the tools to put it in tip top shape,” said Repsol spokesman Kristian Rix said. “Give us a vote of confidence, we are super excited about this one, and Canada is big for us.”

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Short Sellers Circle Oil-Sands Debt as Defaults Loom

By Ari Altstedter and Rebecca Penty

Dec. 8 (Bloomberg) — With crude oil prices the lowest in five years, Marc-Andre Gaudreau says the surest way to profit from the debt of energy exploration and production companies in Canada’s oil-sands region is if they don’t pay it back.

Gaudreau, who manages C$4 billion ($3.5 billion) for Bank of Nova Scotia’s 1832 Asset Management unit, is shorting oil-sands bonds after the last two months saw the biggest rout in crude since the 2008 financial crisis. He declined to name the companies he’s shorting, in which an investor sells a security after borrowing it and hopes to repurchase the asset later at a lower price before returning it to the lender.

Southern Pacific Resource Corp. and Connacher Oil and Gas Ltd. announced last week that they’d hired banks to help raise cash so the companies can avoid missing interest-rate payments. Trading in the bonds shows investors expect less than half the principal to be paid back from the energy companies in Alberta’s oil sands.

 “It would be fair to assume more restructuring in 2015 in the oil patch,” Gaudreau said in a Dec. 4 phone interview from Montreal. “As soon as commodity prices come down, your fixed costs, and even your variable costs, are still there, so you get squeezed. When you get squeezed and you have debt, you just can’t service it.”

Cost Squeeze

Oil-sands companies face some of the highest production costs in the world and are being forced to sell their product at a discount, Gaudreau said. Producers there need at least $85 a barrel to make money on new projects, according to the Canadian Energy Research Institute. The North American benchmark traded at $64.46 per barrel at 8:52 a.m. in New York.

“For every dollar you’re losing in the oil price, the oil-sands guys feel it a bit more than everyone else,” said Sonny Mottahed, chief executive officer of Black Spruce Merchant Capital Corp., a Calgary-based private merchant banking firm. “A short on some of these things, if that’s your view that the commodity is going to stay lower, certainly makes sense”

Southern Pacific, with C$432 million of bonds, said last week it had hired Royal Bank of Canada to help address liquidity and capital structure issues after saying it didn’t have enough cash to make interest payments in its latest quarterly report.

The Calgary-based company said in a Dec. 3 statement that it was considering selling itself, all or a portion of its assets, as well as recapitalization and debt restructuring. Investors were only offering about six cents on the dollar on Dec. 5 for its January 2018 bonds, according to prices from Industrial Alliance. Byron Lutes, Southern Pacific’s chief executive, did not respond to a voice-mail message last week requesting comment.

‘Same Situation’

Connacher, with about C$977 billion in debt, said two days earlier that it had hired Bank of Montreal to look at its liquidity and capital structure after saying in November that cash flow may not be sufficient to cover interest payments on debt and it will need to get additional funds next year to stay in business. The company’s August 2018 notes were trading at about 40 cents on the dollar, according to data compiled by Bloomberg.

Chris Bloomer, CEO of Connacher, said he can’t comment on the financial review or whether the company risks defaulting on its debt. The lower oil price is affecting the entire industry, some more than others, he said.

“Everybody is dealing with the same situation in trying to get their head around it in terms of the short and medium term and what to do about it,” Bloomer said Dec. 5.

Industry Issue

Producers across the industry are starting to brace for the worst, an extended period of depressed oil prices.

MEG Energy Corp., a Calgary-based oil-sands developer, said Dec. 4 it reduced its capital budget for this year by a third and plans to keep 2015 spending flat and funded with cash on hand. Canadian Oil Sands Ltd., said Dec. 3 it’s lowering its dividend by 42 percent.

Canadian Natural Resources Ltd., the nation’s largest producer of heavy oil, has set aside C$2 billion it can remove from its budget of C$8.6 billion next year if prices remain low.

Expansion by investment grade oil-sands firms will still be profitable because of the long lives of the projects, while junk-rated companies wouldn’t be able to generate positive earnings with North American crude at $80 per barrel, according to an Oct. 28 report from Standard & Poor’s.

“It’s possible that smaller companies that are credit constrained could see their credit profiles weaken in 2015,” Michelle Dathorne, a credit analyst at S&P in Toronto, said by phone Dec. 5. “It depends on their ability to attract external liquidity, whether it’s through equity infusions through new owners or joint venture partners, or their ability to add leverage on their balance sheet.”

To contact the reporters on this story: Ari Altstedter in Toronto at; Rebecca Penty in Calgary at

To contact the editors responsible for this story: Dave Liedtka at

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Canadian Oil Companies Gather for CGEF’s “World of Opportunity” Conference

Anne Leonard, November 25, 2014

“Follow the mice to find the elephants,” attendees of the third annual Calgary Global Exploration Forum (CGEF) conference were told last month. While Calgary’s international players, with a couple notable exceptions like Husky Energy, are generally small juniors and even smaller start ups, their impacts have indeed been felt worldwide. In sheer numbers alone they are impressive, as 165 Canadian E&P companies are currently active in 100 different countries. And in what is probably the greatest geographical concentration of energy companies anywhere in the world, most of these firms are within a nine-by-seven-block area in central Calgary.

So the “World of Opportunity” conference was comprised of an impressive lineup of international speakers. As was the case at its first two conferences, the gathering included Canadian success stories in various corners of the globe and a range of Canadian-operated international prospects that are available for farm in. However, this conference turned the tables a bit as it also offered sessions featuring NOCs, Canadian companies touting their cutting-edge technology, experts in raising capital for E&P, and several firms that shared their experiences in social responsibility.

The topic in the forefront of nearly everyone’s agenda these days, at least in the Western Hemisphere, is the opening of Mexico after slamming its doors to international E&P players three-quarters of a century ago. Jorge Miranda of SMPS Legal said the best opportunities in Mexico for Canadian players are not the 169 blocks offered in Round One, which he described as being primarily “huge prospects with huge complexities.” Rather Miranda said Canadian companies should be looking at the blocks Pemex retained in Round Zero. In Round Zero Pemex laid claim to 83% of the country’s 2P reserves and 21% of its prospective resources. The good news for companies looking for opportunities in Mexico is that Pemex will need technical expertise to grow production and maintain these assets.

Another opportunity lies in the existing Comprehensive Contracts for Exploration and Production (CIEP) and Public Works Contracts Financed (COPF), which may be migrated into E&P contracts. The operators of those contracts will also need partners to move forward.

“The time to approach Pemex is now,” was Miranda’s advice to Canadian E&P firms.

Cam Boulton with McDaniel International also outlined the opportunities opening up in Mexico, advising attendees on how to “get a piece of the pie.” He noted that although Mexico in the past decade has substantially increased its E&P expenditures, both production levels and reserves have continued to decline. Therefore, Boulton said, significant opportunities are available for companies with expertise in heavy oil, deepwater exploration – particularly on the Lower Tertiary trend on the Perdido Fold belt– and shale gas exploitation.

Round One offers acreage in the Perdido area, while Pemex is looking for farmout stakes in its Trion, Maximino, Exploratus, Kunah and Kiklis fields. The tender also features heavy oil tracts in the Southeastern Basin, while additional opportunities are available in partnerships with Pemex in the Ogarrio, Cardenas, Mora, Sinan, Bolontiku, Ek, Utsil-Tekel Ayatsil fields.

In the past decade Pemex has devoted a lot of capital and man hours to Chicontepec, with little to show for it. Blocks in this geologically complex play are included in Round One. And while the Eagleford is the hottest play in the US these days and certainly doesn’t stop at the Rio Grande, no Eagleford acreage is being offered in Round One. Rather it is another near-Texas unconventional play, namely the Cuenco de Sabinas, which lies across the Rio Grande south of Del Rio.

While Mexico tended to take the spotlight, a number of other country representatives had traveled to Calgary to promote their opportunities, including Suriname. Marny Daal-Vogelland of Staatsolie said her country, which is perched on the northeastern shoulder of South America on the highly prospective Atlantic Margin, is striving to have 40% of its offshore leased by the end of 2015, up from the current 34%. Staatsolie is also looking for partners in its onshore Nickerie and Commewijne blocks.

Jevon Hilder of Spectrum outlined the prospectivity of Croatia, which is in midst of its first onshore bid round that will close on February 18, 2015. Hilder says the Mediterranean country expects to following with a second onshore bid round in late 2014/early 2015 focusing on the Sava sub-basin, possibly followed by a third further down the line.

Mark Priest of the UK Trade & Investment was on hand to share the news that his country is committed to developing its shale gas to meet its domestic needs. At present, UK gas demand is 2.6 Tcf, of which half is imported. Consequently, as Prime Minister David Cameron said, “We are going all out for shale.” This push offers access to new entrants who can provide lower cost, faster and easier asset sharing. The government is also actively working to garner community support. Priest concluded, saying the geologic knowledge is “expanding all the time” and the country’s Bowland shale is very gas rich, 50% more than US Barnett Shale.

However, as Drillinginfo’s Northwestern Europe manager Bruce Walker notes, the 14th Landward Licensing closed at the end of October, with preliminary reports indicating only around 100 applications were received for the round. Walker said in addition to the Bowland, several other shale plays are also attracting interest. Chemicals multinational INEOS has staked a claim in Scottish shale gas acreage and has promised to offer US-style royalties to landowners on their acreage, while IGas and Cuadrilla continue to await regulatory approvals to advance their own unconventional plans.

Canadian companies’ well-established reputation for success abroad was certainly the draw for these countries appearance at the conference, and certainly any number of Calgary-based firms are due certain bragging rights. Among those is TransGlobe Energy, which after seven years in Egypt has become one of that North African country’s leading onshore drillers. In the process, TransGlobe can claim a number of ground-breaking achievements: first international company in many years to create a core area in the onshore Gulf of Suez, Eastern Desert; first to drill a horizontal well with a multi-stage stimulation; first to implement routine well stimulation on a field basis in a non-conventional reservoir; first to discover the syn-rift Red Bed stratigraphic play; and anticipated to be the first company to implement a chemical flood (ASP) EOR scheme.

Drillinginfo’s Tom Liskey, Dai Jones, Bruce Walker and Ian Blakeley can be reached for further comment on their areas of expertise, respectively Latin America, Continental Europe, the UK and North Africa. Also for further information see:

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Oil industry swashbucklers hit by war, disease and shale boom

By Nia Williams

CALGARY, Alberta, Nov 24 (Reuters) – The world has become a more difficult place for the small, intrepid Canadian oil explorers that roam the globe hunting for the next big petroleum discovery.

Like the big-game hunters that once ranged Africa, these small-cap explorers and producers (E&Ps) call their quest for billion barrel-plus oil deposits “elephant-hunting”, and for many the thrill of the chase is a big part of why they are in business.

“A guy can invest in the Alberta oil sands or a Bakken shale-type company and they are going to make a little bit of money, but they are not going to hit that grand-slam home run we are looking for in elephant country,” said Mark Sommer, spokesman at Simba Energy.

But Ebola, Islamic State and the Ukraine conflict have made an already tough market tougher for these companies, while potential investors are finding the North American shale boom a more comfortable place for their money.

Some of the E&Ps are trying to diversify and bring production back home to Canada’s more stable environment. For most, however, that is not an option. Their expertise lies in finding and proving oil deposits, not asset development.

At Simba Energy, the bulk of its operations are in Kenya but it also has assets in Ebola-stricken Liberia and in Mali, where Tuareg rebels are demanding greater autonomy.

The company is trying to exit Mali and will re-evaluate its Liberian operations if the Ebola outbreak lasts more than another six months, Sommer said.


The E&Ps have always faced some challenges operating in risky areas but only recently has the sector also had to compete with North American shale plays for capital.

E&Ps operating internationally have raised about $6 billion in capital this year, about 10 percent of global issues in the sector, according to RBC Capital Markets. The other 90 percent went to North America.

Merger and acquisition activity in the sector is at a six-year low. On Canada’s TSX Venture Exchange, which has a long history of pairing risk-tolerant investors with companies drilling in distant and dangerous places, initial public offerings have been down two years in a row.

Chris Beltgens, corporate development manager at East West Petroleum, said he has been frustrated by the way the conflict in Ukraine has soured investor attitudes toward East-West’ activities in neighboring Romania.

And a tough market for E&Ps bodes ill for exploration worldwide as small caps are often first to drill in a new region.

If drilling is successful, larger companies take note and follow or buy the E&P outright as commodity trading house Glencore did with Caracal Energy and its Chad assets earlier this year.

“They (E&Ps) start off with prospectivity and follow with exploration success,” said Sonny Mottahed, chief executive at Black Spruce Merchant Capital. “We have gone through three years in the international E&P space where this has been a fairly challenging outcome.”


Some E&Ps are trying to make the switch from international to domestic.

When new management took over Groundstar Resources Ltd two years ago it decided to shift operations back to Canada, and it now has production in Saskatchewan. The company left Iraqi Kurdistan in 2013 but still has operations in Egypt.

“When we took over we basically said let’s come back closer to home and develop assets over here and get ourselves to a much more stable cash flow company,” said chief financial officer Shabir Premji.

Calvalley Petroleum is trying to diversify assets so production is not solely concentrated in Yemen, where sectarian warfare is a danger.

Others are hanging on. Mena Hydrocarbons halted drilling in Syria two years ago but CEO Magdy Bassaly said it will return if the country stabilizes as the company’s well is a good prospect. (Editing by Peter Galloway)

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Sonny Mottahed, CEO & Managing Partner, Black Spruce Merchant Capital

November 12, 2014


Can you give us a brief introduction to Black Spruce Merchant Capital and its main areas of expertise?

Sonny Mottahed (SM): Black Spruce Merchant Capital was founded two years ago as a niche, boutique investment bank, providing impartial advisory services. Our sole focus is on energy-related projects and clients, both domestic and international.

A large part of our international focus is on Latin America, having worked in Argentina, Brazil, and most considerably in Colombia. Black Spruce entered the Colombian oil and gas market in 2006 and financed a large number of Canadian-based private and public companies operating in this region. Although Colombia and Mexico are very different countries, there are many parallels between the regulatory, commercial, and stakeholder standpoints.

Given Black Spruce’s presence in Latin American oil and gas markets, how closely is it monitoring the reforms underway in Mexico?

SM: Black Spruce is certainly keeping a pulse on developments in Mexico’s oil and gas industry. With that said, there are a number of moving targets as to what will actually happen with the reforms. Inclusively, there are upwards of 50,000 companies that participate in the Mexican oil and gas business, while the industry as a whole employs around one million people. Within this mix there will be myriad financing and advisory services required.

Which segments of the Mexican oil and gas market will afford investors the greatest opportunities once the new reforms take hold?

SM: Existing fields occupy a large space in the marketplace, but there is still much uncertainty as to what involvement will look like, be it through licenses or joint ventures. Overall though, brownfield opportunities, such as existing conventional fields and heavy oil will attract the largest aggregate interest from junior companies. Shale is a bit unique, as it is still very much a greenfield opportunity, although clearly the Eagleford formation extends into Northern Mexico. There are major service companies that already have had a long-term presence in Mexico, but the opportunity for many service companies will be in taking their experience and technology and applying them to the newly reformed market.

Many analysts have stated that Mexican plays could be a longer-term investment. What returns will investors expect for conventional plays and under what timeframe?

SM: Capital is fungible; this has been proven time and time again. Mexico has to be competitive in the context of the plays that are going to be put out for bid, proposal, or joint venture. Different companies are going to require different rates of return to make projects viable. When considering technological expertise, balance sheet strength, and the fact that capital has to be appropriately matched with a project’s risk profile, the reality is that capital will need to command international returns. Mexico will have to remain competitive to attract international financing.

What are the levels of risk that investors may be willing to accept when considering Mexican oil and gas plays?

SM: The investment community always has certain players who like to be considered first movers. However, most of the investment community is likely to adopt a watch-and-wait mentality. Some of the variables up for consideration are not easily managed, although physical safety can likely be secured. Political, public opinion, and sovereignty risk will certainly all weigh in on the minds of investors. However, at this time, Black Spruce believes that the stars have aligned in a way that will allow the reforms to happen. There is enough grassroots momentum to get the reforms to hold. The concept of re-nationalization is always a risk but these things do not usually happen in one-year cycles. It is something that is going to weigh in as people assess the risk environment of Mexico as a whole.

Can we draw parallels between Mexico’s newly reformed oil and gas sector and that of neighboring countries, such as Colombia?

SM: Colombia did many things right as it moved to reform its oil and gas sector. The country clearly separated its regulatory authority from the national oil company; this runs parallel to what is happening in Mexico. It is important to have an independent authority to manage the business. In Colombia, there was also a buy-in from the state oil company, which is also happening in Mexico. Companies need to know that contracts their contracts will be safe in Mexico. As of now, this probably is not quite as certain as in Colombia.

What macroeconomic repercussion might face the North American energy market as Mexico ramps up production?

SM: For the United States it would be a “Hollywood problem” to have more reliance on Mexican and Canadian crudes. It is a high quality problem for the United States to have Canadian and Mexican supplies on the rise. As far as gas is concerned, the North American market boasts the cheapest sources in the world, but it is going to be rangebound until new outlets are found for demand. Canada’s oil and gas dominance is unlikely to see any negative consequences as a result of Mexico’s reforms.

Where would you like to see Black Spruce positioned in the future?

SM: Black Spruce’s team wants to be involved with local Mexican companies that have current activity in the business, as well as with international players that are looking to take on a role in the Mexican marketplace. We see ourselves playing a significant role amongst junior and intermediate E&P companies and Oilfields Service companies that want to get active in shale or existing fields activity. Black Spruce has a high level of expertise that holds relevance and application to the Mexican marketplace.

This interview was conducted as part of research for GBR’s upcoming report on Mexico’s oil and gas industry, which will be published in Oil & Gas Investor magazine in January 2015. If you wish to contribute with your comments, please contact Irina Negoita at

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Canada oil producers set to cut 2015 spending as price tumbles

By Scott Haggett and Nia Williams

(In U.S. dollars unless noted.)

Nov 4 (Reuters) – Falling oil prices will lead to lower capital spending in Western Canada next year, observers say, as both oil sands and light oil producers look to cope with less cash coming in the door.

North American benchmark oil prices touched $75.84 a barrel on Tuesday, the lowest since October 2011, after Saudi Arabia cut export prices to the United States.

Although Canadian producers say they are in a strong position to withstand a slump in crude prices, falling profits from oil production look likely to prompt lower capital spending as the hardest-hit look to for ways ride out the storm.

“It’s probably going to force a lot of people’s hands into doing transactions,” said Sonny Mottahed, chief executive of Black Spruce Merchant Capital.

“The (smaller) companies are going to immediately feel the impact on cash flow, so they may start curtailing spending darn fast. The bigger companies … may continue to forge ahead. They can probably endure as long as a year of depressed oil prices.”

Canadian producers are in the midst of firming up spending plans for 2015, with most expected to announce their budgets in coming weeks.

Talisman Energy Inc has cut its current year budget by 6 percent to $3 billion and said it would take the price outlook into account when finalizing its 2015 capital spending program.

“These are difficult times in the energy sector, no doubt about that,” Hal Kvisle, Talisman’s chief executive said on a Tuesday conference call.

Oil sands producer MEG Energy Inc has also lowered its 2014 spending to C$1.6 billion ($1.4 billion) from C$1.8 billion.

Western Canada’s oil and gas producers are forecast to spend about C$76.7 billion in 2014, according to figures compiled by FirstEnergy Capital. With cash flows declining because of lower prices, the investment bank expects that to drop to C$71.1 billion in 2015.

However, most spending on oil sands projects in northern Alberta is already locked in and cuts are more likely to hit early-stage projects.

“If we were to get consistent lower commodity prices that’s probably only really going to show in oil sands production maybe four or five years from now,” said FirstEnergy analyst Michael Dunn.

Indeed, Suncor Energy Inc, said it expects to spend between C$7 billion and C$8 billion next year, about the same as 2014, as it builds its new Fort Hills oil sands mine.

“We have to cut our cloth within our means, but you will not see capital budget coming up and down and these projects being stopped and started,” Suncor chief executive Steve Williams said on an Oct. 30 conference call.

Despite the gloomy outlook, producers and industry observers said it was unlikely any oil sands producers would take the costly step of shutting in production.

“Any cash flow is better than none,” FirstEnergy’s Dunn said. (1 US dollar = 1.1406 Canadian dollar) (Editing by David Gregorio)

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As oilpatch reporting season begins, crude price drop top of mind

Lauren Krugel
October 20, 2014

CALGARY – The recent rout in oil prices will likely be top of mind for investors as Canada’s top oilpatch players release their third-quarter results over the next few weeks.

The steep drop in the key U.S. benchmark crude — to about US$80 a barrel from around US$95 just a month ago — won’t be evident in companies’ financial reports for the quarter ended Sept. 30.

But analysts and investors will be paying keen attention to the mood of top brass on quarterly conference calls and looking for signals about how oil market volatility may affect future plans, said Lanny Pendill, an analyst with Edward Jones in St. Louis, Mo.

Right now, oil and gas producers are hammering out their budgets for 2015.

“As a whole, we’re probably at the price point where I think many of the companies are going to approach the budget season with a little more caution,” he said.

“Just the tone and the overall impression that they leave with us … I think will be key. So we will certainly be focusing on the go-forward comments more than anything.”

Projects under construction in northern Alberta should be in good shape, but prospects are less certain for some that haven’t yet received a final board arrpoval, said Pendill. In recent months, Canadian units of France’s Total and Norway’s Statoil have opted not to proceed with their Joslyn and Corner oilsands projects, respectively.

Cenovus Energy Inc. (TSX:CVE), one of Canada’s top oilsands producers, will be reporting on Thursday. That company has developed a reputation as being one of the lowest-cost producers in the industry, and Pendill expects it to continue to thrive in the current oil price environment. Supply costs for its projects range between US$35 and US$65 a barrel, meaning even its most pricey projects can generate a decent profit.

Cenovus extracts bitumen using steam-assisted gravity drainage, or SAGD, technology. Steam is pumped underground through a well, where it softens the tarry bitumen enough that it can be drawn to the surface through a second pipe.

Steam-driven, or in-situ, projects are generally much more cost effective than the more traditional surface mining operations. Since most of the remaining oilsands resource in northern Alberta is too deep to be mined, most future projects will employ in-situ techniques.

Husky Energy Inc. (TSX:HSE), also on deck to report Thursday, is close to starting the first phase of its Sunrise SAGD project, part of a partnership with BP. The company has signalled that costs would be higher than its most recent estimate of C$2.7 billion, but hasn’t yet said by how much.

Oilsands producers learned some hard lessons during the financial crisis of 2008 and 2009, said Pendill. The oilpatch saw a spate of high-profile project deferrals as crude prices cratered to levels that were at times less than half of what they are today.

Those companies have since done a better job managing their debt. They’ve also become reluctant to undertake multibillion-dollar megaprojects. Instead, companies like Cenovus and Suncor Energy Inc. (TSX:SU) are building SAGD projects in bite-sized increments, essentially copying and pasting the design with each new phase. Miners, like Canadian Natural Resources Ltd. (TSX:CNQ) and Suncor, are boosting output through “debottlenecking” — squeezing more crude out of existing projects by tweaking equipment, rather than building something new from scratch.

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‘Follow the Mice” to International Plays: Banker

James Mahony – October 17, 2014

When it comes to untested plays around the world, international juniors often open the door for major producers, a Calgary-based investment banker told colleagues in Calgary this week.

“Follow the mice to find the elephants,” said Sonny Mottahed, summing up the approach som majors have taken as they wait for juniors to tackle riskier plays in uncharted, usually onshore regions of the world. “Junior companies lead the pack into new jurisdictions, and they’re often followed by majors.”

Mottahed was speaking at the Calgary Global Exploration Forum’s annual conference in Calgary this week. “At the highest level, [the work] starts off with prospectivity and delivers on exploration success,” he said, acknowledging the past three years have been “fairly challenging” for many international E&P companies.

Thursday’s speakers also discussed how new jurisdictions go about attracting producers. For Mottahed, whose firm Black Spruce Merchant Capital Corp. has backed juniors in the international space, it takes prospectivity, energy reform, new licensing rounds, and “good geopolitics.” In recent years, having unconventional resource potential has also helped, he said.

Juniors entering foreign territory typically pursue one of two strategies, proving up as much resource as they can, then monetizing the play before first production, something he called a “good formula” that’s been proven. Another path is to take steps to improve the value of current discoveries, yet leave enough “meat on the bone” to attract the buy who can deploy the amount of capital needed to get “full value.”

As with domestic juniors, internationals have their preferred venues, and current hotspots include the onshore United Kingdom, France and Germany. In addition, Mexico, Peru, and Myanmar have drawn international E&P players. East Africa has also been a hotspot, with companies exploring in Kenya, Tanzania and Mozambique in recent years.

In some countries, international juniors have boosted national production, as occurred in Colomiba, where they pushed average daily volumes to about 190,000 boe per day. Yet, the reason some international jurisdictions are in favour, while others fall out, is more complex. Mottahed said fiscal and regulatory changes can be the root of a change in attitude – for or against – the host country.

Nothing a familiar pattern, he cited the Kurdistan region of Iraq, where acreage was acquired by sever juniors early in the game. In many cases, those companies later sold their interests to much larger players, including majors that had initially stayed away.

A similar pattern unfolded in Poland, where such juniors as BNK Petroleum Inc., San Leon Energy plc and 3Legs Resources plc initially led the country’s shale gas rush. Today, those players have been displaced by Chevron Corporation, ConocoPhillips, Italy’s ENI S.p.A., France’s Total S.A. and other global heavy-hitters, who are able to invest the substantial capital needed to develop reserves.

Yet, while the potential reward in the international arena is often high, the space is also perceived as risky by many lenders and underwriters. Another speaker at Thursday’s CGEF conference agreed the last few years have been a challenge, as public equity issues by international E&P companies have fallen, whether measured by deal value or the number of deals closed.

“For good companies with good ideas and assets, there’s always an ability to get [capital], just maybe not at the price you wanted,” said Rob King, managing director for RBC Capital Markets. He called the recovery in international E&P companies “gradual”, noting the stocks of some companies have traded at or near their historical lows.

On that score, King has seen a disconnect between the public market valuations of internationals and their business performance. He cited an example: Calgary-based Gran Tierra Energy Inc., which operates in South America. The company’s stock has traded at roughly 2.5 times cash flow, he said. While issuing stock in public markets has been a mainstay for many juniors, international players have had to work harder recently to raise money, and are also sourcing debt capital and private equity. Ross Robertson, an executive with New York-based Durham Capital Corporation, said his firm taps secured, junior and senior debt capital from institutions, often pension funds, insurance companies and university endowment funds.

When it comes to clients, Durham looks for international companies that are “liquidity-strained by temporary circumstances.” The firm practises reserves-based lending. “At the end of the day, it boils down to the collateral value of the [borrower's] assets,” he said. “If they were sold, what kind of price would they raise?” He acknowledged his firm’s clients pay a higher price, in the form of a higher interest rate and higher fees, in return for greater flexibility.

Another speaker, representing two ‘pure-play’ exploration juniors that operate in Indonesia and Africa, posed a question to panel members discussing the financing climate for international juniors. “What sort of characteristics need to come back into the market to make it frothy for exploration companies?” he asked.

“This is a risk-return business,” said Pentti Karkkainen, a founder and senior strategy advisor with Calgary-based KERN Partners Ltd., a private equity firm that focuses on the energy sector.

“To the extent that [investors] can achieve returns by taking less risk, they’re going to do that. …I think [Rob King's] charts show that, given [company] valuations and where people can otherwise invest a dollar, they can get very attractive returns on a risk-weighted basis by doing things other than taking risks associated with exploration. So, why would you do that?”

After Thursday’s panel discussion, Karkkainen said private equity firms like his are always looking for good assets in the companies they back, but “top-decile” management teams are still key.

“It still starts with management, and our appreciation of their capability to truly build something of standing and consequence, to somehow differentiate themselves. There is no formula that says ‘this is the way it’s gonna be.’ It’s based on a view, a feeling, and the experiences and skill sets of management to be able to do something.”

With a longer time-horizon than some firms, KERN backs a company on the understanding that they will be working together for a while. “You can source a deal, but then you have to live it for maybe seven, eight or nine years,” he said. “Becoming truly a partner with the management teams really makes a difference.”

Before starting KERN, Karkkainen worked as an analyst in the investment community. “Back in my analyst days, I used to say the loneliest job in town is the CEO’s. It’s still a very lonely job, because who does that individual talk to when things aren’t going quite right? You want to develop that kind of relationship with a management team and work things through when they’re tough.”

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Does Canada’s oilpatch IPO rush have legs?

Claudia Cattaneo
Tuesday, Sept. 9, 2014

Increasing market appetite for Canadian energy stories is fuelling anticipation of more initial public offerings.

Junior companies that grew with private funds are considering making the leap to newly receptive public equity markets.

Larger companies are seeing opportunity to build value by spinning off assets getting little market recognition into new, publicly traded entities. Management teams are regrouping and looking for ways to get back in the game.

Seven Generations Energy Ltd., Teine Energy Ltd., Petrus Resources Ltd., are among the companies being talked about as potential IPO candidates, following this year’s going-public successes of Cardinal Energy Ltd., Journey Energy Inc., Northern Blizzard Resources Inc.

Oil majors such as Canadian Natural Resources Ltd. and Cenovus Energy Inc. are considering taking advantage of pent-up demand by spinning off their royalty-generating lands, after Encana Corp. blazed the trail this week by putting its royalty lands and IPOing PrairieSky Royalty Ltd., and then selling its remaining interest for a rich $2.6-billion.

The IPO talk is another phase of the sector’s rebound, which has also seen lots of interest from private U.S. capital as well as hedge funds. Investors have returned with the easing of pipeline bottlenecks and with firmer oil and gas prices.

But is the oilpatch getting saturated with capital, particularly with oil prices looking weak again — or does the IPO story have legs?

Views are mixed.

“I don’t think this is a top-of-market type phenomenon,” said Terry Shaunessy, president and portfolio manager of Shaunessy Investment Counsel in Calgary.

He welcomes the arrival of new names in Canadian resources, where the number of stocks has dwindled.

Many big names like Nexen Inc. and PetroCanada are no longer available to invest in because of acquisitions. Junior ranks thinned out when investment dried up.

“I think you have another couple of years of good markets to go,” said Mr. Shaunessy, who manages money for wealthy individuals and First Nations trusts. He sees the weakness in oil prices as a temporary reflection of the strong U.S. dollar that will be rectified by stronger global economic growth in the next 12 to 18 months.

Kevin Adair, president and CEO of Petrus, said his company is looking at its options after announcing Tuesday it is increasing the size of a private placement to up to $155-million from $110-million because of strong demand.

Petrus raised the money to fund the takeovers Arriva Energy Inc. and Ravenwood Energy Corp., and to acquire assets in the Ferrier area. The transactions, announced last week, are expected to boost its production to about 10,000 barrels of oil equivalent a day and expand its drilling inventory.

“I don’t think the market is oversaturated,” Mr. Adair said. “Capital has been tight and there has been rationalization. What we are seeing now is a re-alignment” as funds flow back into the Canadian energy space.

Sonny Mottahed, CEO and managing partner of Black Spruce Merchant Capital in Calgary, said there are five to 15 new management teams looking to get back into the game by recapitalizating existing companies.

“I am not suggesting that all of these deals will get done,” he said. “The investor appetite has continued to be selective, even through an active market for energy financings. They have gravitated to known names. It hasn’t been a complete free-for all, and that is going to continue.”

Paul Vaillancourt, senior managing director for Western Canada at Fiera Capital Corp., expects a “frothy” fourth quarter as IPOs, mergers and acquisitions, and divestitures pick up speed.

He believes some of the market activity makes a lot of sense, but some of it looks like “financial engineering” that could prove to be costly for investors jumping in late in the game.

“The oilpatch has certainly awoken from its slumber in 2014,” Mr. Vaillancourt said.

But “I think we are closer to the end of the cycle than the beginning … because we are closer to the end of ultra low rates than normalized rate. The best place to be is still equities, but as rates go up, the returns will not be there in some of these frothy sectors and investors chasing returns might get caught.”

Still, it’s encouraging that after years of scouring the world, particularly China, for capital, with poor results, Canadian energy companies are bouncing back, staying independent, and re-connecting with their natural backers — investors who get the market, and who are able to share in their successes, if and when they come.

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Petroamerica and Suroco Complete Plan of Arrangement

CALGARY, ALBERTA–(Marketwired – July 15, 2014) -


Petroamerica Oil Corp. (“Petroamerica“) (TSX VENTURE:PTA) and Suroco Energy Inc. (“Suroco“) are pleased to announce that the previously announced plan of arrangement under the provisions of the Business Corporations Act (Alberta) among Petroamerica, Suroco and the shareholders of Suroco (the “Arrangement“) was voted on and overwhelmingly approved by holders (“Suroco Shareholders“) of common shares of Suroco (“Suroco Shares“) at the reconvened Annual General and Special Meeting of Suroco Shareholders held on July 14, 2014 (the “Meeting“). Holders of over 78% of the outstanding Suroco Shares voted at the Meeting, with approximately 91.5% voting in favour of the Arrangement. The Arrangement also received approval from the Court of Queen’s Bench of Alberta on July 14, 2014. The Arrangement is more fully described in the management information circular and proxy statement of Suroco dated May 27, 2014, as amended pursuant to two supplements to the management information circular, all of which may be viewed at (All dollar amounts shown herein are in Canadian Dollars).

Under the Arrangement, holders of Suroco Shares were able to elect to receive one of the following for each Suroco Share held:

  1. 2.2161 common shares (“Petroamerica Shares“) of Petroamerica (the “Share Consideration“);
  2. a cash payment for a portion of the Suroco Shares tendered and Petroamerica Shares in consideration for the balance of the Suroco Shares tendered such that, for every 100 Suroco Shares, the electing Suroco shareholder would receive approximately 164.01 Petroamerica Shares in exchange for 74.01 of those Suroco Shares (being 2.2161 Petroamerica Shares per Suroco Share) and would receive approximately $20.79 in cash for the remaining 25.99 Suroco shares (being $0.80 per Suroco Share) (the “Cash and Share Consideration“); or
  3. $0.80 in cash (the “Cash Consideration“).

Effective immediately, trading in Suroco Shares has ceased and all Suroco Shareholders will be provided with the consideration described above, depending on the election made by such Suroco Shareholder. Of the 135,769,734 Suroco Shares issued and outstanding on the effective date of the Arrangement, approximately 13.6% (18,505,134 shares) requested the Cash Consideration, 7.8% (10,546,300 shares) requested the Cash and Share Consideration and approximately 78.6% (106,718,300 shares) will receive the Share Consideration. As a result, Petroamerica will be paying approximately $17 million dollars pursuant to the Arrangement and issuing 253,795,411 Petroamerica Shares to Suroco Shareholders. Following completion of the Arrangement, there are approximately 858 million Petroamerica Shares outstanding.

In connection with the Arrangement, Juan Szabo, a director of Suroco, was appointed as a director of Petroamerica. Mr. Szabo is a professional engineer with over 39 years’ experience in Oil & Gas industry. After starting his career as a Design Engineer for Baker Oil Tools in Houston, Texas, he began a long career in the Venezuelan Oil industry, initially with Creole Petroleum Corporation (Subsidiary of Exxon) and later with Lagoven S.A. Pequiven S. A. and Petróleos de Venezuela. Mr. Szabo has also served as a member of the Board of Directors of Pequiven, PDVSA Oil and Gas, Citgo Petroleum and several Joint Venture Companies. Since 2007, Mr. Szabo has served as advisor to private and public companies such as Inepetrol, CANTV, and P.T. Energi Mega Persada Tbk (Indonesia) and Alentar Holdings Inc., as well as for multilateral organizations such as the InterAmerican Development Bank (BID) and the Central Bank of Ecuador. Mr. Szabo holds B.S. and M.S. degrees in Mechanical Engineering with Petroleum Option from the University of Houston.

Pursuant to the letter of transmittal mailed to Suroco Shareholders as part of the materials in connection with the Meeting, in order to receive the Petroamerica Shares to which they are entitled, registered holders of Suroco Shares will be required to deposit their share certificate(s) representing Suroco Shares, together with the duly completed letter of transmittal, with Computershare Trust Company of Canada, Petroamerica’s and Suroco’s depositary under the Arrangement. Suroco Shareholders whose Suroco Shares are registered in the name of a broker, dealer, bank, trust company or other nominee must contact their nominee to deposit their Suroco Shares.

Over the next few weeks the combined company will take steps to consolidate its operations. The combined company will hold working interests in 11 blocks covering over 1 million gross (439 thousand net) acres in the Llanos and Putumayo Basins in Colombia. Petroamerica will also provide an operational update shortly, as well as provide updated capital spending and production estimates for the balance of fiscal 2014.

Black Spruce Merchant Capital Corp. acted as sole financial advisor to Petroamerica with respect to the Arrangement. GMP Securities L.P. and Canaccord Genuity Corp. acted as strategic advisors to Petroamerica in connection with the Arrangement.

Peters & Co. Limited acted as financial advisor to Suroco with respect to the Arrangement.

About Petroamerica

Petroamerica Oil Corp. is a Canadian oil and gas exploration and production company with activities in Colombia. Petroamerica’s shares are listed on the TSX Venture Exchange under the symbol “PTA”. A summary of the Company property holdings, including maps of the above noted acquisition, has been included in the current presentation located at

Forward Looking Statements:

This news release includes information that constitutes “forward-looking information” or “forward-looking statements”. More particularly, this news release contains statements concerning expectations regarding Petroamerica following completion of the Arrangement, including the business strategy, priorities and plans, the evaluation of certain prospects in which Petroamerica will hold an interest following the completion of the Arrangement and other statements, expectations, beliefs, goals, objectives assumptions and information about possible future events, conditions, results of operations or performance. Readers are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur. By their nature, forward-looking statements involve numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, estimates, forecasts, projections and other forward-looking statements will not occur, which may cause actual performance and results in future periods to differ materially from any estimates or projections of future performance or results expressed or implied by such forward-looking statements.

Material risk factors include, but are not limited to: the inability to obtain regulatory approval for any operational activities, the risks of the oil and gas industry in general, such as operational risks in exploring for, developing and producing crude oil and natural gas, market demand and unpredictable shortages of equipment and/or labour; potential delays or changes in plans with respect to exploration or development projects or capital expenditures; fluctuations in oil and gas prices, foreign currency exchange rates and interest rates, and reliance on industry partners and other factors, many of which are beyond the control of Petroamerica. You can find an additional discussion of those assumptions, risks and uncertainties in Petroamerica’s Canadian securities filings.

Neither Petroamerica nor any of its subsidiaries nor any of its officers, directors or employees guarantees that the assumptions underlying such forward-looking statements are free from errors nor do any of the foregoing accept any responsibility for the future accuracy of the opinions expressed in this document or the actual occurrence of the forecasted developments.

Readers should also note that even if the drilling program as proposed by Petroamerica is successful, there are many factors that could result in production levels being less than anticipated or targeted, including without limitation, greater than anticipated declines in existing production due to poor reservoir performance, mechanical failures or inability to access production facilities, among other factors.

The TSX Venture Exchange Inc. has in no way passed upon the merits of the Arrangement and has neither approved nor disapproved the contents of this press release.

Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

Contact Information


Petroamerica Oil Corp.
Nelson Navarrete
President and Chief Executive Officer

Petroamerica Oil Corp.
Colin Wagner
Chief Financial Officer

Petroamerica Oil Corp.
Ralph Gillcrist
Chief Operating Officer and Executive Vice President
Bogota, Colombia: +57-1-744-0644
Calgary, Canada: +1-403-237-8300 /

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