Canadian equity markets risk being swamped with oil sands company shares this year as Royal Dutch Shell and ConocoPhillips prepare to offload $6.8 billion (US$5.1 billion) worth of stakes in two domestic producers, just months after acquiring them.
The two companies acquired shares in Canadian Natural Resources Ltd and Cenovus Energy as part of deals struck earlier this year to sell off oil sands assets.
Sources told Reuters on Tuesday that Shell has decided to sell its $4.1 billion stake in CNRL, while ConocoPhillips has said it is not a long term investor in Cenovus.
The plans to flip the stakes within months of acquiring them is raising fresh doubts about investor confidence in the world’s third-largest crude reserves. Shell’s decision to sell is a “surprise and not immaterial” to CNRL, a source familiar with CNRL’s thinking said. The Canadian producer declined to comment on Wednesday.
Shell owns roughly 8.8 percent of CNRL and has not said whether sales would be done via public offering or IPO.
Foreign companies have sold US$22.5 billion worth of Canadian oil sands assets this year alone, due to depressed global crude prices, high operating costs and limited pipeline access to market. The latest planned stake sales are more gloomy news for a region struggling to compete with cheap U.S. shale plays.
With Canadian producers spending heavily this year on buying up the fleeing majors’ assets, there is also a limited list of potential domestic buyers for the sale.
Shell’s quick exit may also make it difficult for other majors contemplating an exit, including BP and Chevron, to propose share-based structures, that take part of the consideration in stock and rest in cash, as they prepare to sell their Canadian oil sands business, people working on energy deals said.
“I would be very cautious about investing in more traditional oil production like the oil sands on a longer-term basis,” said David Cockfield, managing director of Northland Wealth Management, which holds some CNRL stock on behalf of clients. “The game plan is just not working anymore.”
These shares could attract interest from hedge funds, private equity and institutional investors if priced at a discount to the market price, energy sector analysts said.
Asian oil companies could also potentially be interested in owning oil sands assets without the risk of operating them themselves, according to Wood Mackenzie analyst Peter Argiris. Canadian Prime Minister Justin Trudeau‘s government is seen as more open to Chinese investment than its predecessor though the oil sands will prove the big test.
CNRL shares closed down 0.6 percent on the Toronto Stock Exchange, while Cenovus shed 1.2 percent. Year-to-date CNRL is down 4.1 percent and Cenovus has fallen 37 percent.
Under the terms of the deal to sell most of its oil sands business to CNRL, Shell has to wait four months from closing, which has not happened yet, to sell the shares.
ConocoPhillips’ sale of Cenovus shares is likely to have a bigger impact given the U.S. company owns nearly one-fifth of the Canadian company, a stake worth around $2.7 billion.
“The share overhang is one of the reasons we should not expect much movement upward in the Cenovus share price,” said Len Racioppo, managing director of Coerente Capital Management, a Cenovus shareholder that in April asked Canadian regulators to halt the deal.
ConocoPhillips has to wait six months from the close of the deal, which occurred last week, for a lock-up period on the shares to end and will look to liquidate its position over time, Chief Financial Officer Don Wallette said on a conference call in March, adding the company will do it an orderly way as it is in their best interest.
“There are such big tranches of stock coming out we run the risk of flooding the market,” said Colin Cieszynski, chief market strategist at CMC Markets. “If two of them hit in the same week, or even the same month, it could be an issue because there’s so much money involved.”
(Reporting by Nia Williams; Additional reporting by John Tilak; Editing by Denny Thomas and Cynthia Osterman)
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