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Canadian Oil Sands Brace As Oil Majors Dump Shares

By Tsvetana Paraskova – May 30, 2017, 5:00 PM CDT

Royal Dutch Shell and ConocoPhillips struck deals in March to sell Canadian oil assets to two Canada-based producers. In both deals, parts of the consideration for the transactions were shares of the Canadian companies that Shell and ConocoPhillips received.

Although the share transactions are subject to lock-up periods of up to six months following the closing of the deals, Shell and ConocoPhillips are getting ready to sell those shares—possibly months after acquiring them—regulations and agreements permitting.

The potential sale of billions of dollars worth of shares in Canadian Natural Resources and Cenovus Energy may see the Canadian equity market flooded with company stock, according to analysts quoted by Reuters. Hedge funds, private equity firms, or institutional investors may be interested in the stakes, if shares are priced at discount to market prices, analysts reckon.

The possible sales, however, could also rekindle concerns over how confident investors are in placing money in Canada’s oil sands reserves.

At the beginning of March, Shell said it was selling oil sands interests to Canadian Natural Resources for around US$8.5 billion, comprised of US$5.4 billion in cash and around 98 million Canadian Natural Resources shares valued at US$3.1 billion at the time. Shell’s oil sands sale was part of its strategy to focus on free cash flow and higher returns on capital, and prioritize businesses such as integrated gas and deep water, CEO Ben van Beurden said.

Shell has to wait for a four-month period after closing—which has not been announced yet—before flipping the shares in Canadian Natural Resources, equal to around 8.8 percent of the company. Last week, four people familiar with Shell’s moves told Reuters that the Anglo-Dutch oil major had been in contact with investment banks to hire an adviser for the share sale, which could be one of the largest-ever equity deals in Canada.

Shell’s move to sell its stake is a “surprise and not immaterial” to Canadian Natural Resources, a source familiar with the Canadian company told Reuters.

At the end of March, ConocoPhillips announced the sale of oil sands assets in Canada to Cenovus in a US$13.3 billion transaction including US$10.6 billion in cash and 208 million Cenovus shares, valued at US$2.7 billion on March 28, 2017.

At the time, Cenovus said that “at closing Cenovus and ConocoPhillips will enter into an investor agreement, and a registration rights agreement which, among other things, will restrict ConocoPhillips from selling or hedging its Cenovus shares for a period of six months from the closing date of the transaction.”

Closing took place on May 17, and ConocoPhillips now owns around 16.9 percent of Cenovus. But the U.S. firm said that “Depending on market conditions and regulatory requirements, ConocoPhillips may from time to time decrease its beneficial ownership, or decrease its control or direction over any of Cenovus’s securities through market transactions, private agreements or otherwise.”

ConocoPhillips’ potential sale of the stake, or part of it, could have a material impact on the Canadian company and its share price, given the hefty portion of shares the U.S. group currently holds.

ConocoPhillips and Shell are not the only companies that have divested Canadian oil sands assets in recent months. Norway’s Statoil has sold its entire oil sands operations in Alberta to Athabasca Oil Corporation, in exchange for cash and shares in Athabasca representing just below 20 percent of the company equity. Related: Saudi Arabia Signs $50 Billion Worth Of Oil Deals With The U.S.

Focused on boosting cash flows and pleasing shareholders with a constant stream of dividends, international majors have been scaling back operations in Canada’s oil sands, considered too expensive in the lower-for-longer oil price world.

A Wood Mackenzie report from this month highlights the Q1 2017 developments in the oil sands with the two blockbuster M&A transactions worth a combined US$23 billion. Other rumored oil sands sellers include BP, Chevron, and Total, according to WoodMac.

The recent transactions follow a wave of consolidation in the oil sands and now over 70 percent of oil sands production is concentrated in the hands of four of Canada’s largest producers: Suncor, CNRL, Imperial Oil and Cenovus,” the energy consultancy said.

Beyond the financial transactions, Canada’s oil sands production rose by 9 percent annually to a new quarterly high of 2.47 million bpd in Q1 2017, thanks to the ramp-up of new phases in projects, WoodMac noted.

Canadian oil sands are now more Canadian than ever before, and there aren’t a lot of Canadian players that would have the money to buy ConocoPhillips and Shell’s stakes in Cenovus and Canadian Natural Resources, respectively. If Shell and Conoco were to sell, buyers may be hedge funds and institutional investors.

By Tsvetana Paraskova for Oilprice.com

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