Exxon Favors Gas Over Expensive Oil Sands in M&A Deals

International investors including Exxon Mobil Corp. (XOM) are favoring natural gas over oil sands acquisitions in Canada as the less-expensive way to supply Asian markets.

Three of the five largest energy acquisitions announced by foreign buyers in Canada this year, valued at a combined $9.8 billion, were for natural gas assets, according to data compiled by Bloomberg. The trend will continue next year as liquefied natural gas developers move closer to commissioning projects, said Robert Mark, who helps oversee C$4.5 billion ($4.5 billion) at MacDougall, MacDougall & MacTier Inc. in Montreal.

“There’s a unique scramble in Canada to lock up gas assets for LNG,” he said. “Asian buyers look at that as a significant opportunity.”

A race to secure natural gas for planned LNG export on Canada’s West Coast by Royal Dutch Shell Plc, Exxon and others has spurred interest in the fossil fuel among investors seeking to benefit from the price differences between Asia and North America. With at least five LNG projects valued at as much as $15 billion each proposed for British Columbia’s northwest coast, proponents are lining up supplies from reserves such as the Horn River and the Montney shale formations.

Record Premium

Canadian natural gas traded yesterday at C$3.175 per gigajoule, after more than doubling from a 10-year low of C$1.4475 on April 20. That compares with about $16 for LNG contracts sold in Japan. A gigajoule is a unit of energy. About 100 gigajoules of natural gas is required to heat a single family home in Canada for one year.

Foreign buyers of natural gas producers or assets this year include Tokyo-based Mitsubishi Corp. (8058), Japan’s largest trading company; Irving, Texas-based Exxon; and Petroliam Nasional Bhd, Malayasia’s state-owned oil and gas company. The premiums paid for those assets have reached as high as 97 percent, according to data compiled by Bloomberg.

Petroliam Nasional, known as Petronas and based in Kuala Lumpur, boosted its first offer for Progress Energy Resources Corp. (PRQ) to C$22, or 97 percent more than the Calgary-based company’s 20-day average before the initial proposal, the steepest premium on record in the oil and gas industry.

Petronas yesterday extended its C$5.16 billion offer for Progress after an initial regulatory rejection by the Canadian government on Oct. 19. Progress rose 0.4 percent to C$19.89 at 4:19 p.m. today after soaring 8 percent yesterday.

Deals Increasing

Exxon, the world’s largest energy company by market value, agreed to pay C$2.86 billion for Calgary-based Celtic Exploration Ltd.’s leases in Alberta’s gas-producing Duvernay and Montney formations on Oct. 17, its biggest Canadian acquisition.

Canada’s decision on Petronas’s bid will determine how many more foreign investors are lured to Canada, said John Stephenson, who helps manage C$2.7 billion at First Asset Investment Management Inc. in Toronto. He owns shares of natural gas producers including Painted Pony Petroleum Ltd. (PPY) and Crew Energy Inc.

“It remains to be seen how many of these deals get done,” he said in a phone interview. “Up until this point, natural gas deals have been on the upswing.”

Producers with holdings in the Montney formation in northeastern British Columbia, could see bids for assets or entire companies as LNG proponents secure gas reserves, said Gordon Currie, analyst at Salman Partners Inc. in Calgary.

“You need to have a lot of reserves tied up to support an LNG export facility so it’s entirely possible they would be out looking to tie up additional resources,” Currie said in a phone interview.

Possible Targets

Targets could include Painted Pony, Talisman Energy Inc. (TLM), Advantage Oil & Gas Ltd. (AAV), and ARC Resources Ltd. (ARX), Currie said. Shares of these gas producers, all based in Calgary, have declined this year through yesterday, with Painted Pony down 5.3 percent; Talisman, 7.2 percent; Advantage, 18 percent; and ARC Resources, 3.2 percent.

Patrick Ward, Painted Pony’s chief executive officer, was not immediately available to comment yesterday when contacted by phone by Bloomberg.

Exxon looks for “value” for its shareholders, Alan Jeffers, a company spokesman said in a phone interview, yesterday. The company is in the “very early stages” of evaluating an LNG terminal for western Canada.

Advantage is considering a strategic review after announcing in August that it plans to sell “non-core” assets, Doug Jackson, a company spokesman said in a phone interview today. Phoebe Buckland, a spokeswoman for Talisman, did not immediately respond to an e-mail request for comment. Niki Anderson, a spokeswoman for ARC Resources, said the company had “nothing to add” to its past position on market perceptions it could be a target. The company is not interested in being taken over or in pursuing joint ventures, David Carey, ARC Resources vice president of capital markets, said in a Sept. 14 interview.

Stranded Gas

Among companies seeking partners to develop gas reserves in Canada are Encana Corp., which is marketing a stake in its Duvernay shale acreage in Alberta and Cutbank Ridge acreage in British Columbia.

Building infrastructure to allow “stranded” gas reserves to reach new markets makes those assets more attractive to potential investors, said Tim Marchant, an adjunct professor of energy strategy and geopolitics at the University of Calgary and a former senior manager at BP Plc. (BP/)

TransCanada Corp. has agreed to develop a 700-kilometer (434-mile) pipeline in British Columbia to link gas from the Montney to an LNG project in Kitimat led by Shell. Spectra Energy Corp. (SE), based in Houston Texas, has signed on with BG Group Plc (BG/) to build a separate 850 kilometer line from the Montney to BG’s proposed terminal in Prince Rupert.|

Oil Sands

“Any time you get a major trunk line built, a lot of assets that may have been considered stranded, become attractive because you can evacuate them,” Marchant said in a phone interview. “Asian state-owned oil companies are planning in a very holistic way for energy demand over the next few decades and North American gas is cheap if you want to add reserves.”

Oil sands projects will probably require C$23 billion this year in investments, according to the Canadian Association of Petroleum Producers. Foreign companies are holding off on oil sands purchases, said Wenran Jiang, a University of Alberta professor and adviser to the Alberta government on Asian investment.

Asian national energy companies and private investors are eyeing Western Canadian natural gas reserves as well as conventional oil deposits outside the oil sands to quench current supply shortages, Jiang said.

“Oil sands are too big in scale, in terms of advanced investment and the slow pace of return and scale of the infrastructure building,” Jiang said in a telephone interview from Edmonton on Oct. 26.

Canada Crude

Price discounts for Canadian heavy crude, made from oil sands bitumen, when compared to prices paid for Brent, the international benchmark, are also working against oil sands investments, said Mark of MacDougall, MacDougall & MacTier.

“As an international investor you look around the globe, and you see that you’re getting paid in Brent, but with Canadian heavy crudes, you’re getting a big discount,” he said. “If you’re buying assets, you might be more inclined to buy gas or conventional crude.”

U.S. energy companies ConocoPhillips (COP), Marathon Oil Corp. and Murphy Oil Corp. said they are all considering divesting oil-sands assets amid industry concerns about project cost overruns and discounting of Canadian crude prices as export pipeline capacity is squeezed.

To contact the reporters on this story: Jeremy van Loon in Calgary at jvanloon@bloomberg.net; Rebecca Penty in Calgary at rpenty@bloomberg.net

To contact the editors responsible for this story: David Scanlan at dscanlan@bloomberg.net; Susan Warren at susanwarren@bloomberg.net

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