Executives at some of Canada’s biggest pension funds say they are looking more closely at the oil and gas sector, attracted by low valuations, but will take a scrupulous approach to deals given the uncertain oil price outlook.
The funds say they are prepared to overlook depressed oil prices in the short term if it means they can directly invest in assets at knock-down prices, especially as rival investors retreat and lenders get tough with struggling companies.
Pension funds are under less pressure than other investors, such as private equity firms, to hit short-term targets and may be able to cherry-pick assets.
“We see some great values because, unfortunately, there is capital that is leaving Alberta as the oil price sinks. So we see excellent opportunities for long-term investors,” said Kevin Uebelein, chief executive of Alberta Investment Management Corp, which manages $90 billion in assets.
Oil started to sell off in mid-2014 when a global supply glut from excessive U.S. shale crude production began to pressure prices at above US$100 a barrel. U.S. crude oil settled at US$34.66 a barrel on Wednesday.
Fund industry executives talk of Calgary’s bars and restaurants being full of Toronto and New York investment bankers, in town to size up investments in anticipation of a wave of deals.
A possible trigger could come when banks conduct debt covenant reviews this spring that may reduce credit for some energy clients.
Canada’s biggest pension funds, such as the Canada Pension Plan Investment Board and Ontario Teachers’ Pension Plan, have for years sought investment alternatives to volatile global equities and low-yielding government bonds.
Bankers say oil and gas assets across North America could prove attractive to them, especially so-called midstream plays like pipelines and storage tanks.
“The pension funds will definitely be active in the energy space and are keenly studying some of the assets that are currently in the market, both midstream and upstream,” one Calgary-based banker told Reuters.
INFRASTRUCTURE ASSETS
Another Calgary-based banker said pension funds were particularly interested in energy infrastructure.
“We have distressed sellers looking to de-leverage and the only assets they can sell right now and get bids on are infrastructure assets like pipelines and processing facilities,” he said.
Canada’s 10 biggest public pension funds, which have more than $1.1 trillion of assets under management, currently have only modest sums directly invested in oil and gas assets.
Ontario Teachers’ is one of the biggest investors with $11.9 billion invested in natural resources at the end of 2014. Last year it bought Cenovus Energy Inc royalty properties for about $3.3 billion.
An executive at one of Canada’s three biggest public pension funds, who did not want to be named, said his organization was looking at setting up an office in Calgary this year to study possible targets, but emphasized the need to maintain investment discipline.
“There will definitely be opportunities. It’s not for the faint-hearted though,” he said.
Roland Lescure, chief investment officer at the Caisse de dépôt et placement du Québec, Canada’s second-biggest public pension fund, said uncertainty about the sector remained.
“Are we vigilant for opportunities? Yes. Are we being very cautious because of the exogenous risk right now? The answer to that is also yes.”
By Matt Scuffham
(Additional reporting by Euan Rocha in Toronto and Nia Williams in Calgary; Editing by Matthew Lewis)
(This story has been edited by Kirk Falconer, editor of PE Hub Canada)
Photo courtesy of Shutterstock
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