Big 4 in the oilsands could soon become the Big 5

Husky Energy has ambitions to grow but instead of building a new,multi-billion-dollarfacility in the Alberta oilsands, the Calgary-based company is launching a hostile takeover of MEG Energy.

It's a $6.4-billion offer and would boost Husky's oil production by about a third,propelling it among the oilsands' biggest players.

Right now, there are four large players in the oilsands:Suncor, Imperial Oil, Canadian Natural Resources and Cenovus. In 2016, before a slew of acquisitions, the Big Four owned just over half of all oilsandsproduction. That figure is now more than 70 per cent after several deals increasedthe stake for the four companies.

There are fewer things to acquire and we've seen considerable consolidation in theoilsands.- Kevin Birn, analyst

If the takeover of MEG is successful, Husky could join their ranks.

Husky would leapfrog other companies like Devon, Chevron, Total and ConocoPhillips tobecome thefifth-largestoilsandsproducer, according to energy research firm Wood Mackenzie. While its oil output willstill lag considerably behindthe Big Four, the company would havea pathto join them,considering the capacity for growth at the existing facilities as well as the projects currently in development.

The hostile takeover attempt continues the trend of growth by acquisitionlargely because developing a new project requires patience and risk. A new oilsandsfacility can take a decade to plan, gainpermits and construct. The regulatory process alone can take several years without a guarantee of approvals.

Acquiring an existing project or company reduces the risk and there's no long wait to start generating revenue. During that wait companies may face a changing regulatory process, construction cost changes and fluctuating commodity prices.

"Companies want what's already there and what's already on," said Stephen Kallir, a Calgary-based analyst with Wood Mackenzie."When you look at the risk associated with time, it is becoming much, much larger."

Why oilsands companies are buying instead of building

6 years ago

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Wood Mackenzie analyst Stephen Kallir says companies don't want the risk and long wait time of building new oilsands facilities.

The oil price crash and continued low value for heavy oil are other reasons for the influx of deals in the oilsands.

In recent years, consolidation around Fort McMurrayhas happened in small deals that fly under the radar to large blockbusters attracting widespread attention. Canadian Natural Resources, for instance, acquired most of Shell's oilsands propertiesin May 2017 for$12.74 billion, while also making relatively more modest moves such as purchasing the undeveloped Joslyn oilsands property for $225 million in August and obtainingLaricinaEnergy for what's believed to be $46 million in September.

Suncor'stakeover of Canadian Oil Sands two years ago and Cenovus' purchase of assets from ConocoPhillipslast year are other notable deals of consolidation.

"Sometimes for a company there is a strategic reason.They see something bigger or more valuable in that asset than if they would build an equivalent," said Kevin Birn, an oilsandsanalyst with IHS Markit.

Economies of scale

Larger oilsandscompanies were better at weathering the oil price downturn because of their size and ability to lower their expenses. Usually, the higher volume of production equates to lower costs per barrel of oil asadministrative and other costs are spread out.

"That's always been the challenge with anoilsandscompany is getting to that scale," said Birn.

Analyst Kevin Birn on why oilsands companies need scale

6 years ago

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Usually, the higher volume of production equates to lower costs per barrel of oil as administrative and other costs are spread out.

In thetakeover attempt of MEG, Husky said "The combined company will have a lower earnings break-even price of $40 per barrel US," for West Texas Intermediate, the North American benchmark.Husky also said there could beapproximately $200 million in synergies annually from the acquisition.

The large oilsands players keep growing and some experts expect the trend to continue, especially as heavy oil prices struggle to bounce back from the oil price downturn. But others say the rate of consolidation mayslow downas fewer oilsandscompanies remain.

"As acquisitions occur, there are fewer things to acquire and we've seen considerable consolidation in the oilsands," said Birn.

Over the last three years, he said,about one-fifth of oilsandsproduction has changed hands.