Canadian Natural Weighs Shale Sale Amid Glut

Decisions by Canadian Natural Resources Ltd. and Talisman Energy Inc. to sell almost half a million acres of natural gas-soaked rock threaten to depress prices for land that drew a record premium last year.

Canadian Natural may sell 250,000 acres in the Montney Shale, one of western Canada’s largest gas finds. Talisman also is seeking a buyer for parts of its 200,000-acre holding, which it estimates may be worth as much as $1.5 billion. The Calgary-based companies join other producers who are offering acreage after Exxon Mobil Corp. and Petroliam Nasional Bhd., or Petronas as the Malaysian company is known, paid billions of dollars for stakes in the Montney.

“It’s undeniably a buyer’s market,” said Robert Mark, a director and analyst at MacDougall, MacDougall & MacTier Inc. in Toronto, which has C$2.5 billion ($2.44 billion) under management. “There is more up for sale than I’ve ever seen in my 12 years in the business, between land packages, joint venture opportunities and full companies.”

Petronas’ $5.2 billion takeover for Progress Energy represented a 97 percent premium, the highest ever paid for an oil and gas producer worth more than $1 billion, according to data compiled by Bloomberg. Exxon paid C$2.86 billion to buy Celtic Exploration Ltd. last month, or C$6,800 an acre for its Montney holdings, according to ITG Investment Research Inc.

‘Scarcity Premium’

The Montney, located in Alberta and British Columbia, offers producers like Exxon, Royal Dutch Shell Plc and Chevron Corp. the option of exporting Canadian gas to Asia by liquefying it at terminals on the Pacific Coast.

“With more and more assets coming to market, the scarcity premium is not necessarily what it was,” Mark said in a phone interview on March 7. Companies proposing liquefied natural gas terminals have already snapped up the best Montney acreage, he said, with Progress the “the crown jewel.”

Talisman earned $376 million, or 37 cents a share, during the fourth quarter, its first profit during the last three-month period of the year in four years, after selling assets and cutting costs, the company said on Feb. 13. Canadian Natural’s fourth-quarter profit declined 58 percent to C$352 million, or 32 cents a share, as crude prices fell and it recorded a foreign-exchange loss, the company said on March 7.

Buyers won’t offer the same premiums as Exxon and Petronas due to the acreage glut, much of it not in the best parts of the Montney, said Greg Dean, analyst and portfolio manager who helps oversee about C$6 billion at CI Investments Inc. in Toronto.

‘Substantial Discount’

“The reason you won’t see those premiums is the supply and demand imbalance,” Dean said in a phone interview yesterday. “There will be a substantial discount.”

The Montney, a 26,000 square-kilometer (16,155 square-mile) formation the size of Vermont, is estimated to contain 450 trillion cubic feet of gas, according to the British Columbia government.

“We don’t speculate on what we may or may not acquire, nor do we speculate on prices,” Chevron spokesman Lloyd Avram said in an e-mailed reply to questions. Exxon does not comment on potential future acquisitions, Alan Jeffers, an Exxon spokesman, said in a phone interview yesterday. Stephen Doolan, a Shell spokesman, also declined to comment when reached on his phone.

Canadian Natural, the nation’s largest gas producer after Encana Corp., and Talisman are trying to raise cash through sale or joint partnerships as both cut spending on gas output in the aftermath of North American prices hitting a 10-year low.

‘Lot of Transactions’

Canadian Natural stock dropped 9.6 percent over the past 12 months to yesterday and has 17 buys, eight holds and no sells while Talisman has declined 6.4 percent with eight buys, 19 holds and no sells, according to analyst ratings compiled by Bloomberg. Both have trailed the benchmark Standard & Poor’s/TSX Composite index which is up 2.8 percent over the same period.

Canadian Natural was little changed at C$32.12 at 4:07 p.m. in Toronto today. Talisman, which settled a dispute over its Yme offshore operation in Norway earlier today, rose 1 percent to C$12.56.

The Montney sale is part of Talisman’s plan for $2 billion to $3 billion in global asset sales or joint venture deals as it seeks to cut costs and boost profit, the company said on March 6.

“There are a lot of transactions and a lot of other acquisition and divestment activities going on in the Montney and that of course is a concern,” CEO Hal Kvisle told reporters on a March 6 conference call.

Canadian Natural said it doesn’t need to sell and will only do so at the “right price,” Steve Laut, president of Canadian Natural, said in a March 7 phone interview. The Montney strategy is a departure for the company, which doesn’t usually sell assets or seek partners.

‘Strong Demand’

“If you look at some analysts, they say it’s a buyers’ market and other analysts say there’s strong demand for these properties,” Laut said. “This is well positioned for somebody who needs gas for LNG projects. We expect some of those players would be interested.”

One of the largest Montney holders, Murphy Oil Corp., said in October it had hired an adviser to review alternatives for its 156,000 Montney acres. The company, based in El Dorado, Arkansas, would “seriously consider a sale” if it gets a “compelling offer,” Chief Executive Officer Steven Cosse told analysts on a Jan. 31 conference call.

Advantage Oil & Gas Ltd., a Calgary producer with Montney acreage, said on Feb. 5 it hired advisers to review strategic alternatives. Advantage’s “core Glacier asset is materially undervalued,” in its share price, the company said in a statement.

Australian Producer

Tammy Taylor, a spokeswoman for Murphy Oil, did not immediately return phone and e-mail messages seeking comment. Advantage Chief Executive Officer Andy Mah and the company’s investor relations department did not immediately return phone messages.

Companies proposing liquefied natural gas terminals in Canada may not be done buying, Eric Nuttall, a portfolio manager who oversees C$90 million at Sprott Asset Management LP, said in a March 7 phone interview.

Woodside Petroleum Ltd., Australia’s second-biggest oil producer, is in talks with companies on a potential partnership to enter Canada’s gas industry, CEO Peter Coleman said in an interview on Feb. 21. Laura Lunt, a spokeswoman for Woodside, declined to comment on possible purchases or prices.

Private talks may have prompted Talisman and Canadian Natural to list acreage for sale, Nuttall said.

‘Curiously Coincidental’

“To me, it’s curiously coincidental that all of these packages come to market at exactly the same time,” he said. “It makes me suspicious that there’s been interest expressed by a very large entity,”

Tourmaline Oil Corp. and Painted Pony Petroleum Ltd. are potential takeover targets because of their Montney holdings, Dean said.

Painted Pony Chief Executive Officer Patrick Ward said the potential Montney sales by Talisman and Canadian Natural don’t “hurt” the company. “We don’t need to get bought out,” Ward said yesterday in a phone interview, pointing to cash on the company’s balance sheet and no debt.

Scott Kirker, a Tourmaline spokesman and general counsel for the company, declined by phone to comment.

‘Continuing’ Buy

The area has been a buyer’s market for two years, Dean said. “We see it continuing.”

The acreage most in demand may be small pieces that can be tacked onto larger positions, as well as big swaths of land to support new LNG entrants, according to Goodman & Co. Investment Counsel Ltd.

“There are buyers for little tuck-ins and the big spreads,” Toronto-based Jennifer Stevenson, vice president who helps manage about C$100 billion Goodman, said in an e-mail on March 8. “The in-between will struggle.”

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