Originally posted 21 June 2016
Investment in Alberta is highly cyclical due to the resource base of the oilsands located in the Fort McMurray (Regional Municipality of Wood Buffalo) area. Since the federal and provincial governments agreed to a resource development framework in the late 1990s, tens of billions of dollars have been invested in both oilsands mining and in-situ facilities. Since 2005, one could argue that the whole Alberta economy has been driven by the investment boom in the Fort McMurray area as a number of large Canadian (CNRL, Suncor-PetroCanada, Nexen, Cenovus-Encana, Husky) and multi-national corporations (Exxon-Mobil, StatOil, Total, Shell) competed to exploit this resource base.
What is unique about the resource base is its size (approximately 173 billion barrels) and the fact that the resource is known. However, to bring the bitumen to market requires huge upfront capital expenditures and then a manufacturing process to remove the sand from the oil. Fortunately for the oil sands producers the fall in natural gas prices has assisted in the reduction of costs, particularly the steam to heat the bitumen. Then there is the question of pipeline capacity to export the semi-processed product out of the province.
As oil prices have fallen, the economics of exploiting this high cost resource have deteriorated. At the present time, a number of projects are being completed but large future investments are unlikely with current oil prices.
Enbridge- Spectra Energy
The recently announced transaction involving Calgary’s Enbridge and Houston-based Spectra Energy illustrates the critical role of investment opportunities for large energy and pipeline companies. Institutional investors scour the world for undervalued companies and one measure that is carefully monitored is the ability of corporations to pay predictable and rising dividends. A company’s capacity to raise dividends is a function of the future investment projects that will expand a corporation’s profits. Another popular way to raise dividends is through share buy-backs that involve reducing the number of shares outstanding which in turn enables a company to boost its earnings per share and potentially increase dividends.
The transaction, perhaps the largest ever undertaken by a Canadian firm, appears to have been carefully thought out. It is a friendly transaction, recommended by both boards, and considerable planning has gone into blending the boards and management teams. The legal and regulatory work will entail considerable revenue for Calgary based law firms as well as financial advisers providing opinions to the respective boards and shareholders. The proposed transaction might also be viewed as a defensive combination in the sense that the uncertainty surrounding the $7 billion Gateway project means Enbridge’s capital needs to be deployed somewhere else. The link-up with Spectra widens the consolidated firm’s geographical footprint as well as reducing the firm’s reliance on transporting oil via pipelines.