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Archive for December, 2014

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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