Oilpatch CEOs fear U.S. energy takeover - Jim Buckee, Gwyn Morgan: Industry lacks 'support in our home market'
Financial Post, April 18
Claudia Cattaneo, Calgary Bureau Chief
CALGARY - Canadian investors' lack of support for the oilpatch, along with the low dollar and high taxes, are resulting in the Americanization of the Canadian oil and gas industry, say the chief executives of Canada's two major independents.
"This consolidation is not over yet," said Jim Buckee, president and chief executive of Talisman Energy Inc., who estimates U.S. control of Canadian production is running at 60% or more.
"The oilpatch is not getting support in our home market," said Mr. Buckee. "The big [Canadian] companies ... are trading at historically low multiples. If by their lack of investment [investors] show that they don't want the companies here, they will reap what they sow and the companies will be gone.
"And it will be American companies, which are much better supported in their home markets, that will come and take over."
Mr. Buckee predicted concern about being taken over will fuel merger discussions between some of Canada's largest players, although it will be hard to beat being purchased for a lot of money.
"And the Americans can pay a lot of money, and can also deliver, if they want, their stock, which has a higher premium or a higher trading value than Canadian stock, so all the way around, they win," he said.
Fierce takeover activity during the past year has wiped out most of the sector's mid-cap layer and is quickly depleting the ranks of junior producers, to the point one investment banker predicted the industry could run out of companies to take over by the fall.
A lot of the activity is fuelled by U.S. companies taking over Canadian natural gas assets to feed U.S. power plants.
In the past four months alone, U.S. companies acquired assets worth $4.2-billion, compared with $3.9-billion for all of last year, $1.2-billion in 1999 and $12.8-billion in 1998, when the creation of oil giants such as ExxonMobil Corp. to find efficiencies in response to the oil price collapse led many others to bulk up.
Gwyn Morgan, president and chief executive of Alberta Energy Co., agreed the situation is becoming serious.
"One of the things that frustrates me so much is the discriminatory tax situation, and if Ottawa wanted to see the takeover of Canadian companies continue, there is no better way of discriminating against them," Mr. Morgan said in reference to tax breaks granted by the federal government to all sectors last year except for Canada's resource industries.
"The U.S. guys have an advantage of a stronger dollar and of lower tax rates."
Mr. Buckee said there is no "hue and cry" on the part of Canadian energy leaders about how much of the sector is slipping into foreign hands because "we are entrepreneurial people and we are very used to the idea of survival of the fittest and people getting taken over.
"Individual oil companies -- like if we get taken out for $100 [a share] -- we are all happy," he said. "But the changing nature of Calgary and Canadian industry, that's for somebody else to worry about. There is a big danger of this becoming a branch economy, where companies here are subs of U.S. companies, and all the ramifications of that."
Mr. Buckee said Canadian oil companies are easy targets because they are trading at about half the valuation of their U.S. counterparts, or about three times their cash flow per share, compared to about six times cash flow for U.S. companies, even though Canadian companies are better performers by many measures.
"We keep telling our story and we hope our multiple will go up. We can pay cash for Petromet, but it's difficult to use your paper [for transactions] when it's down at these levels," he said.
Talisman announced last week a $806-million cash bid to take over natural gas producer Petromet Resources Ltd. for $806-million in cash, in its first corporate acquisition in nearly two years.
While the oil and gas group has been one of the best performers on the Toronto Stock Exchange over the past year, Mr. Buckee said the winning story remains, by and large, Canadian natural gas, while oil producers and large international explorers continue to be out of favour.
Analysts say Talisman's stock is suffering from a divestment campaign over its operations in Sudan, but Mr. Buckee said Talisman peers like Nexen Inc. and Canadian Natural Resources Ltd. are trading in the same range or lower.
Pierre Alvarez, president of the Canadian Association of Petroleum Producers, which pegs foreign ownership of Canadian production at about 43%, has been supportive of the latest wave of U.S. investment in Canada.
The group, which has a large representation of foreign companies active in Canada, has argued the Canadian stock market is not big enough to finance all the energy projects underway, and that foreign ownership is offset by Canadian companies increasing international operations.
Photo:
JIM BUCKEE TAKES IN THE WELCOME MAT: Jim Buckee of Talisman Energy is worried about the ongoing takeover of the Canadian oilpatch by U.S. oil and gas companies.
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