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Oilsands Stocks Whipsawed by Merger Talk as Oil Falls



By John Kipphoff

Dec. 8 (Bloomberg) — Canada’s oilsands miners, developing the largest reserves outside Saudi Arabia, are being roiled by takeover speculation after the 72 percent drop in crude prices delayed projects and ruined the outlook for profits.

Nexen Inc. and Opti Canada Inc., owners of the Long Lake oilsands mine in Alberta, soared as much as 53 percent last week on the Toronto Stock Exchange after the Financial Times said France’s Total SA planned a C$19.7 billion ($15.4 billion) offer for Nexen. Both retreated more than 10 percent a day later when the Times of London said Total won’t bid.

“There’s a risk you’ll see these companies go,” said John Stephenson, who helps to oversee about $1.5 billion, including Nexen and Opti shares, at First Asset Investment Management Inc. in Toronto. “They’re pretty much on bended knees at this point. The commodity is so much weaker now that it builds the case for takeovers.”

Companies from Royal Dutch Shell Plc to Suncor Energy Inc. are putting projects on hold after oil slid more than $106 a barrel as recessions in the U.S., Europe and Japan cut energy demand. Crude under $95 a barrel makes it unprofitable to develop oilsands, in which bitumen dug from mines or coaxed from the ground using steam is turned into oil, according to Ryan Todd, an analyst for Deutsche Bank AG in New York.

An equal-weighted index of four oilsands developers — Opti, Nexen, UTS Energy Corp. and Petro-Canada — dropped 76 percent this year, compared with 38 percent declines in the Standard & Poor’s/TSX Composite Index and a broader gauge of Canadian energy producers.

No Cash

Opti lost 88 percent in 2008 to C$1.94 after delaying expansion of the C$6.1 billion Long Lake mine, saying it doesn’t have enough cash. UTS, an investor in the C$25.3 billion Fort Hills, Alberta, project, became a penny stock, slipping from C$6.09 in May, while partner Petro-Canada retreated as much as 65 percent from its peak that month.

Nexen fell to its cheapest valuation on Oct. 10, when the shares traded for 3.2 times earnings over the previous 12 months. That’s 80 percent below the average price-to-earnings ratio over the past five years. Larger rival Suncor fell to 5.6 times earnings on Nov. 20, versus a five-year average of 23.

“It’s an opportunistic way to get in if you want to grow production and reserves,” said Gareth Watson, who helps manage about $46 billion as associate director at ScotiaMcLeod’s portfolio advisory group in Toronto. “The stocks are cheap on a historical basis. But it’s a timing issue. It depends on how long the recession will be and what oil prices do.”

Alberta’s tar-soaked sands may hold 173 billion barrels of oil, enough to supply the U.S. for about 24 years, according to the Canadian Center for the Study of Living Standards, an economic research firm based in Ottawa.

Fast Start

UTS, Petro-Canada, Opti and Nexen benefited from the surge in oil prices earlier this year, rising an average 24 percent through June, compared with a 4.6 percent gain in the S&P/TSX and a 22 percent advance in Canadian energy stocks, according to data compiled by Bloomberg.

As crude retreated, producers such as Royal Dutch Shell, based in The Hague, delayed decisions on oilsands development, while Suncor cut its 2009 capital budget by a third.

Suncor decreased 56 percent this year, while Canadian Oil Sands Trust, lead owner in Syncrude Canada Ltd., the biggest oilsands producer, is down 44 percent after reducing its dividend in October. Both companies are based in Calgary.

Costs Rise

Petro-Canada, also based in Calgary, raised the cost estimate for its Fort Hills project by more than half in September. Last month, it deferred until 2009 a final decision on the development, which it began when oil was trading above $80 a barrel. The company has already spent $1 billion on Fort Hills.

UTS trades at 84 cents, valuing it at C$398 million. The Calgary-based company must raise about $3 billion for Fort Hills, according to Andrew Potter, a UBS AG analyst in Calgary.

“One of the problems is how do you raise capital,” said First Asset’s Stephenson. “The smaller pieces are logical candidates for being taken out.”

Calgary-based Nexen surged as much as 33 percent to C$29.10 Dec. 2 after the Financial Times reported that Paris-based Total may bid C$38 a share. It fell as much as 24 percent, its steepest intraday drop in 21 years, a day later. Opti Canada rose more than 40 percent two days in a row in November.

“Longer-term, these assets are good,” said Francois Bourdon, who helps oversee about $14 billion as a senior portfolio manager at Fiera Capital Inc. in Montreal. “In the short run, the price of oil and the lack of available credit make these assets too expensive.”

To contact the reporter on this story: John Kipphoff in Toronto

Last Updated: December 8, 2008 11:24 EST


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