How The Hebron Deal Affects Petro-Canada

The agreement between Newfoundland and project partners to finally move forward on development of the $6-billion Hebron offshore oilfield not only includes a government stake, but also some changes to the royalty structure.

For producers like project leader Chevron Corp. (CVX), as well as Exxon Mobil Corp. (XOM), Petro-Canada (PCZ) and Norsk Hydro (NHY), the good news is that the basic royalty rate remains unchanged at 1% until costs are recovered, UBS analyst Andrew Potter told clients in a note. Previously, this rate increased progressively from 1% to 7.5%.

The bad news: A “super royalty” of 6.5% of net revenue after payout (when oil prices are above US$50 per barrel) has been included.

Mr. Potter thinks the new deal is fair to both parties, adding that these fiscal changes will not make a major difference.

For Petro-Canada, the government acquisition values Hebron at C$1 per share, in line with the analyst’s revised net asset value for the project. His previous estimate was approximately C$1.40 per PCA share, but this has been reduced due to higher capital costs and a later start date.

Mr. Potter rates Petro-Canada a “buy” with a C$68 price target, representing upside of nearly 30%.

PCZ 1-yr chart: