Reuters: Canada oil sands firms hope for gains from Shell bid

Reuters: Canada oil sands firms hope for gains from Shell bid

 

By Scott Haggett

 

CALGARY, Alberta (Reuters) – It's clear to everyone in Canada's booming oil sands sector that Shell Canada Ltd. (SHC.TO: Quote) is ready to pay a premium price for tiny Blackrock Ventures Inc. (BVI.TO: Quote), valuing Blackrock reserves at close to C$4 a barrel, or three times the price of previous deals.

 

What is less clear is whether the rest of the industry will reap similar valuation gains, or whether Shell's offer will be a one-off, reflecting the close fit between its operations and BlackRock.

 

“It's a unique set of assets and a unique purchaser,” said Mark Friesen, analyst at FirstEnergy Capital Corp. in Calgary. “I don't think its appropriate to just go out and use that value across the board.”

 

But junior players in the red-hot sector still see the C$2.4 billion ($2.2 billion) offer as a positive for the area, which has one of the world's largest accumulations of oil.

 

“That can only spill over and be positive for those of us there. Transactions are the best valuation metric,” Dick Gusella, chief executive of Connacher Oil and Gas Ltd (CLL.TO: Quote), told Reuters in a recent interview. He described the Shell Canada bid as “pretty healthy pricing.”

 

Connacher, one of the smallest players in the region, is building a 10,000 barrel a day oil sands project named Great Divide. The project, where steam will be pumped into the ground to liquefy the tar-like bitumen that's trapped in the sand, should begin producing by 2008.

 

Earlier acquisitions in the oil sands, made last year from firms like France's Total SA (TOTF.PA: Quote) or China's Sinopec (0325.HK: Quote), boosted the value of the small firms who had already put down stakes in the region.

 

Those offers stoked the shares of companies like UTS Energy Corp. (UTS.TO: Quote), whose main asset is a 30 percent share of the planned C$10 billion Fort Hills oil sands project being built by Petro-Canada (PCA.TO: Quote).

 

UTS stock has more than tripled over the past 12 months, to a recent C$6.30, while shares of Petrobank Energy and Resources Ltd. (PBG.TO: Quote), builder of the Whitesands oil sands project, have risen more than 5-fold over the last year.

 

Connacher stock, worth about 80 Canadian cents a year ago, now trades for C$4.02, and the firm has a market capitalization of less than C$800 million.

 

But the shares of BlackRock's rivals did not rise in response to Shell's May 8 offer, and most have fallen since, sliding along with oil prices and the broader stock market. 

 

That may be because the Shell Canada bid is based on unique features that prevent its offer from becoming a benchmark.

 

“It's not really an apples to apples comparison,” said Kyle Preston, analyst at Salman Partners in Calgary.

 

BlackRock doesn't operate exclusively in the oil sands. It has conventional heavy oil production that doesn't require expensive technology.

 

And a major producing property for BlackRock is adjacent to Shell Canada's own holdings near Peace River, Alberta, where the company plans a 100,000 barrel a day project.

 

The oil sands region, located around Fort McMurray, Alberta, contains an estimated 174 billion barrels of potential reserves, second only to those of Saudi Arabia. But the tar-like bitumen locked in the sands is expensive and challenging to produce and difficult to refine.

 

However with oil prices at current levels, most projects in the region are profitable and output from the area, already more than a million barrels a day, is expected to triple over the next decade.

 

($1=$1.11 Canadian)

 

© Reuters 2006. All Rights Reserved.

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