An EnCana pump jack stands near Rockyford, Alberta, in this June 30, 2009 file photo. Canada's largest natural gas producer, said on November 5, 2013 it will cut about 20 percent of its workforce, slash its dividend, and focus future spending on just five regions rich in oil and gas liquids as it looks to move away from low-value natural gas production.Todd Korol/Reuters
If only they had done this 18 months ago.
Struggling to turn themselves around, Encana Corp. and Penn West Petroleum Ltd. announced corporate overhauls and asset sales on Tuesday and Wednesday, respectively, serving up a one-two punch for the energy sector.
At first there were sighs of relief. Finally, they're getting their fiscal houses in order. But once the reality set in, investors started to realize that the outlook is less rosy than it initially appeared. Penn West is looking to sell $2-billion worth of assets by 2015, while Encana wants to unload an undisclosed amount of natural gas assets because it intends to devote all of its resources to five key plays.
A year and a half ago, foreign buyers were lining up to at least take a peek at what Canada had to offer, with the Chinese especially eager to gobble up some long-term energy plays.
But all that has changed, prompting observers to wonder who, exactly, is going to buy these things?
"In this market, it takes time to sell assets for appropriate value," Talisman chief executive officer Hal Kvisle acknowledged on a conference call, after the company announced plans to cancel its asset sale in the north Duvernay because it couldn't find a buyer. Now Talisman is looking to find a joint venture partner for the same lands.
Even though the federal government's new energy acquisition rules only ring-fence the oil sands from foreign, state-owned buyers, the policy has been strident enough to cool the entire sector. And China itself doesn't seem very willing to go gung-ho on deals. Not only do its state-owned firms already have a presence here, further acquisitions appear to be on the back burner. For example, in October Sinopec Group said it was looking for partners to develop its existing natural gas assets in Canada. The announcement doesn't preclude China from buying more, but it certainly shows that we're in a new phase of the game.
Other global energy giants have their own problems. After years of expansion, shareholders are starting to revolt, arguing in favour of share buybacks and dividends according to a report in the Financial Times.
These companies are already selling assets of their own. BP PLC has already announced plans to sell $10-billion (U.S.) worth of assets in the next two years, and Royal Dutch Shell recently outlined plans to sell its shale gas assets in Texas following a $2.1-billion writedown. A number of the giants were slow to embrace the shale revolution, and got into the game too late to make a big impact. And after so many companies piled into shale gas production, the profit potential isn't what it once was.
Already, Canadian companies are struggling to find partners or buyers. Athabasca Oil Corp. has been looking for foreign friends for over a year now, and though it came close in 2012, the company still hasn't inked a deal.
It certainly doesn't help that Western Canada Select, the Canadian heavy oil benchmark, is once again trading at a discount of over $40 to West Texas Intermediate crude. While Penn West has light-oil assets and Encana has loaded up on natural gas, the increasingly grim outlook for Canadian energy doesn't help their prospects.
Analyst Michael Dunn at FirstEnergy Capital stressed that it's easy to paint a broad narrative over the energy sector, when in fact there are some pretty big differences between companies and the type of energy at hand – shale gas, light oil, heavy oil. "There seem to be unique reasons [to invest in] every type of asset," he said.
However, he did acknowledge that there are a growing number of assets on the block, and that energy companies may have better luck looking for joint venture partners than for buyers, particularly in regions with considerable potential, such as the Montney formation in British Columbia and the northern end of the Duvernay formation in western Canada.