Over the last year there has been a flood of Canadian natural gas and oil assets coming onto the market as a number of oil companies wrestle with turning around their businesses and boosting margins. This has triggered a renewed focus across the oil industry on higher margin lower development cost oil and natural gas liquid production.
But while asset sales are helping some companies to strengthen their balance sheets and boost cash, this sudden increase in assets for sale has created a buyers’ market. Such a market has the potential to not only depress asset prices but derail the successful implementation of a number of turnaround strategies being undertaken across the patch.
Earlier this year, troubled Canadian oil and gas producer Talisman Energy (TSX: TLM)(NYSE: TLM) completed the sale of 75% of its Montney assets to Malaysia’s Petronas for $1.5 billion. This sale was completed as part of its strategic turnaround aimed at unlocking further value for shareholders through the sale of non-core and marginal assets. Talisman also confirmed plans to divest a further $2 billion of assets over the next 12 to 18 months, which will see further oil and gas assets placed up for sale.
Troubled intermediate oil and gas producers Penn West Petroleum (TSX: PWT)(NYSE: PWE) and Lightstream Resources (TSX: LTE) are also in the midst of strategic turnarounds. Both companies are aggressively seeking to divest themselves of non-core natural gas-weighted assets across northern Canada as they desperately try to reduce leverage and shore up their balance sheets.
As a result, Penn West is seeking to divest itself of $1 billion in non-core assets between now and 2015, while Lightstream has announced plans to sell $600 million in non-core assets over the same period. This will see a further $1.6 billion in northern Canadian oil and gas assets made available for sale throughout this year, potentially depressing asset prices.
Recently, global oil exploration and production giant Apache Corporation (NYSE: APA) announced the sale of its oil and gas assets in the Deep Basin area of western Alberta and British Columbia for $374 million. These assets are primarily comprised of Apache’s dry gas-producing properties composed of 622,600 acres in the Ojay, Noel, and Wapiti areas in Alberta and British Columbia. This forms part of the company’s strategy of focusing on growing oil and liquids production from its core operations in North America.
This rash of asset divestments is making it increasingly difficult for vendors to sell assets at their true value. The impact of this can already be seen with Canadian Natural Resources (TSX: CNQ)(NYSE: CNQ) deciding to retain its million acres in the Montney in western Canada, which it had previously offered for sale. This decision was made on the basis of not receiving an offer of sufficient value to merit the sale off those assets, despite the company receiving a number of expressions of interest.
What does this mean for investors?
Clearly those companies potentially most affected are those with weak balance sheets and the urgent need to raise cash. Talisman, Penn West and Lightstream are all in the midst of strategic turnarounds aimed at unlocking shareholder value, which can only succeed if they can complete the required amount of asset sales. If they aren’t able to realize the full value of the assets they plan to sell, they may need to consider further sales to achieve debt reduction targets and free up capital for higher margin projects.
Another concern is that all three companies have seen oil reserves and production fall because of the sale of assets, which has affected their underlying core asset value and cash flow. Accordingly, any additional asset sales would continue this trend and lengthen the amount of time required for those companies to complete their turnarounds and deliver value for frustrated shareholders.
Already as a result of high leverage, diminishing cash flows, and poor operational performances all three have seen their share prices come crashing to earth over the last year. For that period Talisman’s share price plunged 18%, Penn West’s 21%, and Lightstream’s fell 34%, and it is easy to imagine further falls if they are unable to effectively complete their turnaround strategies.
Foolish bottom line
It is a buyer’s market for oil and gas assets in Canada at this time and given the glut of assets for sale, it will remain so for some time. This will predominantly impact those companies that have no choice but to proceed with assets sales to complete their turnaround strategies. Not only will it see them realize less than the full value of those assets but it could further impact their cash flows and core asset values.