Foreign investment to slow moderately in oilsands, but that's not all bad

OTTAWA – Foreign investment in Canada’s oilsands is likely to slow and depress the value of some Canadian firms — but only moderately — as a result of Ottawa’s new rules restricting state-owned enterprises, observers say.

But not everyone in the industry sees the development as a negative, arguing that too much development too fast is not necessarily good business.

“I think the government has played this brilliantly actually,” said Hal Kvisle, chief executive of Calgary-based Talisman Energy.

“The phenomena that’s been going on here lately, that I have not supported, is Canadian companies have been evolving to quick development enterprises, build up a land position, get it to a certain size and sell it out to the highest bidder.”

Gavin Graham of Toronto-based Graham Investment Strategy found another silver lining.

“One of the big problems they had in 2007-08 was this enormous building boom which led to this massive explosion of costs for contractors and labour and pipes and parts,” he said.

“In the event this helps keep a lid on the number of people leaping into the fray to spend at the same time, yes it may actually be a benefit.”

On Friday, Ottawa said going forward it would only allow a foreign state-owned-enterprise (SOE) to acquire majority stake in the oilsands under “exceptional” circumstances.

In Monday trading — the first chance for North American to render judgment — some smaller players were taken to the barber. For some, it was a haircut; for others, a light trim.

As expected, Nexen shares jumped more than 13 per cent to close the day at $26.44 while Progress stock rose 13.37 per cent to $21.96 — near the levels of their purchase prices.

Some smaller firms didn’t fare as well.

Meg Energy Corp. (TSX:MEG) slumped $1.07 to close at $33.65, Connacher Oil and Gas (TSX:CLL) fell more than 20 per cent, while Athabasca Oil Corp. (TSX:ATH) lost early before recovering somewhat to close down 25 cents to $10.00.

Overall, however, the energy index was in positive territory.

“It’s not major because you’ve still got the ability to buy minority stakes, or for private foreign purchasers to buy majority stakes,” said Graham.

Kvisle said another reason for the muted reaction may have been that markets had already anticipated and written down firms likely to be affected.

“I think everybody got the message over the past six months,” he said.

Going forward, Alberta Energy Minister Ken Hughes said “there is a potential for less investment coming into the oilsands,” which he said will increase the cost of capital and production.

The chances of a major collapse in investment triggered by Ottawa’s tougher rules was discounted, however.

Analysts noted that while Ottawa narrowed the opening for SOEs, it hasn’t shut the door. SOEs can still buy up a minority stake in the oilsands, and private foreign firms can still acquire control. As well, the policy leaves untouched other resource plays.

Finally, under “exceptional” circumstances — a term that remains undefined — SOEs would still be allowed to acquire majority ownership.

“Part of the reason we’re not seeing some of these names get struck down is because they do have the ability to go up on their own merit,” said Craig Fehr, Canadian markets specialist at Edward Jones in St. Louis.

Investor interest is currently muted because of the global uncertainty, he said.

“But as we start to see some of that turn around, we’re going to get private capital coming in, not just energy capital, but private equity and all these other areas that will be involved in a growing business.”

Speaking in Toronto, Natural Resources Minister Joe Oliver said there was still “plenty” of private sector money for the oilsands.

“There is a huge amount of capital available globally and quite a bit available inside our country.”

Yet, analysts said there was no point in totally discounting the impact, particularly as Oliver has maintained Canada cannot finance the anticipated $650 billion in investment that will be needed over the next decade.

In an analysis, the Strikeman Elliott law firm, which acted on behalf of Chinese firm CNOOC in the Nexen buy, noted another barrier put up in front of SOEs.

The firm pointed out that while the threshold Ottawa uses to review foreign acquisitions will soon rise to $600 million on the way to $1 billion in four years, the current $330 million level remains in place for SOEs, further discouraging such investment.