46 LEXPERT MAGAZINE
|
MARCH 2016
| ENERGY |
CERTAIN UNCERTAINTY
All that's certain, at the moment, is that the
Saudi-led OPEC effort to flood the world
with oil in an effort to reduce competition
and drown out marginal producers, mainly
in North America, has initiated tectonic
shis in the Canadian and US energy sec-
tor. ere was one sigh of relief for the oil
patch in wild rose country: On Jan. 29,
Alberta's NDP Premier, Rachel Notley,
announced she would accept a royalty re-
view panel recommendation to maintain
the existing royalty structure for the prov-
ince's oilsands sector. Saying that with oil
prices regularly dipping below $30 per bar-
rel, leaving Alberta "in a precarious and
somewhat struggling situation," the NDP
would also keep the current royalty rates
for wells drilled before 2017 in place an-
other decade. For wells drilled aer 2017,
the new regime will preserve existing rates
of return at the outset and simplify calcu-
lations with a flat five per cent royalty rate
until drilling costs are recovered, when the
rate will increase.
Still, coupled with the new NDP gov-
ernment in Alberta, a new Liberal govern-
ment in Ottawa, and new climate-change
agreements in Paris and Alberta designed
to both cap and put a price on carbon emis-
sions fossil fuels at the producer and con-
sumer level, and these days shell-shocked
1,000-yard stares are commonplace in the
Canadian energy patch.
"I have tried to stop reading the papers,
because every time I read it is unbelievably
bad news," says Derek Flaman, an energy
lawyer and partner at Torys LLP in Cal-
gary. Yet, like a car accident, it's hard to
themselves against continued low pricing,
says Carson. "Basically what companies do
in harder times is they look at selling non-
core assets where they can raise money, pay
down debt." ey may use some of it to
keep capital programs going ahead.
Most mid-sized and larger players are
not facing insolvency. But they are sell-
ing off non-core assets – oen midstream
assets such as gas processing facilities or
pipelines – to rebalance their books. Hus-
ky Energy Inc. President and CEO Asim
Ghosh, declaring the oil and gas industry is
in "unchartered territory," announced late
last year that Husky was in discussions to
sell some pipeline assets and oil-storage fa-
cilities in the prairies to "unlock value" and
pay down debt. It was also considering sell-
ing royalty assets producing 2,000 barrels
of oil equivalent per day (BOE/D).
ose are two approaches echoing
through the Canadian energy sector, espe-
cially in the west. And, while merger and
acquisition activity largely came to a halt
beginning in the summer of 2015, save
a few notable exceptions (Cres-
cent Point Energy's acquisition of
Legacy Oil and Gas for $1.53 bil-
lion and Suncor's at first hostile
all-stock $4.3-billion bid for Ca-
nadian Oil Sands that ended on a
friendlier note on Jan. 19 when the
companies announced a $6.6 bil-
lion agreement), there are intima-
tions that in 2016 there'll be more
M&A. "Certainly the pressure for
companies to sell is increasing,"
says Donald Greenfield in Cal-
gary. "And it's increasing work for
restructuring and insolvency lawyers."
MIND THE VALUATION GAP
Greenfield, co-leader of Bennett Jones
LLP's Energy Practice Group, has nearly
40 years' experience in Canadian and inter-
national LNG and oil sands development.
He says one challenge faced by clients as
commodity prices sink and they ponder
selling off assets or royalties as revenues fall
are the valuation gaps. "Sellers think their
assets are worth X in a rising oil price sce-
nario — in other words it can't stay low for
much longer. Whereas buyers don't know if
the bottom has been hit. Even if it has, how
long is it going to last?"
But the gap appears to have "narrowed a
turn away from the scene.
Saudi Arabia and its OPEC allies began
using unlimited oil and gas production to
attack North America's energy in Novem-
ber of 2014. ere have been casualties: In
its latest report, last October, the Confer-
ence Board of Canada estimated Canada's
oil extraction industry would suffer pre-tax
losses of $2.1 billion in 2015. at com-
pares to a $6-billion profit in 2014. (e
board suggested things would improve in
2016, for what that's worth.)
Capital expenditures intended for new
projects or current assets have been slashed
everywhere. Many majors have taken ra-
zors to their capexes for 2016. Cenovus
Energy cut its spending budget 19 per cent,
down to about $1.4 billion from between
$1.8 to $1.9 billion. Encana cut its 2016 ca-
pex more than 25 per cent, shaving down
to about $1.5 billion.
Lorne Carson, a partner in the Calgary
office of Osler, Hoskin & Harcourt LLP
who focuses on project development and
finance in oil and gas, is seeing increased
renegotiation of credit agreements and fi-
nancial covenants, the maturity terms on
loans, and the conversions of unsecured or
subordinate debt into equity as lenders try
to help brighten the balance sheets of bor-
rowers. ese can be tough negotiations for
clients and their lawyers as well. "It's not
the same as where you do a new financing
and you have a closing dinner," Carson says
with a subdued laugh. "ey can be a bit
more tense. But it is business that needs to
be done."
PLAYING DEFENCE
e industry as a whole is playing defence,
with a growing number of companies try-
ing to ward off insolvencies and buffer
SARAH POWELL
DAVIES WARD PHILLIPS
& VINEBERG LLP
"I DON'T SEE carbon leakage
as possible. The world is changing
and the world is going to put a
price on carbon. So whether you
have operations in North Dakota
or Saskatchewan, there's going
to be a price on carbon."
