Evaporating credit to hurt smaller oilsands players
Consolidation expected amid lack of capital
Shaun Polczer, Calgary Herald
Published: Friday, September 19, 2008
Ongoing credit woes roiling global financial markets will make a big impact on smaller operators and speed up consolidation in the cash-heavy oilsands sector, observers said Thursday.
Small independents that rely on capital and equity markets to fund ambitious growth plans could find themselves forced to take on partners or sell out, said Adam Waterous, the president and vice-chairman of Calgary-based oil advisory Scotia Waterous.
"The independent oilsands operator is an endangered species," he said on the sidelines of the Global Business Forum in Banff.
"The independent, small-cap oilsands producer will have a more difficult time remaining independent. This (the credit crisis) is an accelerant, throwing gasoline on the fire to consolidate the independent oilsands companies."
The comments came after Petro-Canada on Wednesday increased cost estimates for the proposed Fort Hills integrated mine by 50 per cent to almost $24 billion.
Junior partner UTS Energy Corp., the original leaseholder which retains a 20 per cent interest in the Fort Hills partnership, scrambled to calm investors facing a $3-billion cash call to fund its share of the project.
The company, which has no production or revenue, has seen three-quarters of its market capitalization vapourize since May.
On Thursday it rose three cents on the Toronto Stock Exchange to close at $1.60, off a 52-week high of $6.37.
Michael Tims, chairman of local energy brokerage and investment house Peters and Co., agreed the credit woes south of the border will force oilsands developers to take a closer look at financing alternatives along with overall project economics in light of rising costs and falling oil prices.
"Going forward I think we have to look at all that capital spending, and especially oilsands capital spending, and say how does the cost of the project relate to commodity prices and also how it relates to the cost of equity and the cost of debt," he said.
"It's on that last variable that we're now going to see a great difference in how people look at investing in the sector."
Overall, Canada's oilpatch comes out of the market meltdown relatively unscathed, with the exception of some battered share prices.
That's because the industry has traditionally relied on internally generated cash flows to fund growth.
Although oil prices have come down from record highs near $150 US a barrel, on Thursday they briefly climbed back above $100.
"In the short run, I don't think there's a huge impact," Tims added. "The industry is actually in pretty good shape and the balance sheets aren't very levered."
Hal Kvisle, president of pipeline giant TransCanada Corp., agreed companies that effectively manage debt before crisis strikes enjoy a competitive edge.
The company will spend $6 billion this year on initiatives including the Keystone pipeline to the U.S. Gulf.
Of that amount, more than half is covered by internal cash flow while the balance is "in hand," he said.
"We know this kind of an event, the disruption in financial markets, can occur," he said. "So it's prudent on our part to try to stay ahead of that."
At the start of the decade, TransCanada faced its own credit crisis, slashing dividends to shore up its finances.
Kvisle said those days are long gone.
"If you go back to the start of my time in this job, we were generating about $1 billion a year in cash flow, of which the first $400 million went to the payment of debt. Now we generate $3 billion and the first $700 million or $800 million goes to the payment of a dividend, so we have five or six times as much available financial strength."
spolczer@theherald.canwest.com
© The Calgary Herald 2008
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