In the most recent endorsement of the massive potential of Alberta's under-explored shales, Exxon's (XOM) acquisition of Celtic Exploration Ltd. (CEXJF.PK) demonstrates the validity of the industry thesis that the prolific shale formations driving the share prices (at least, in part) of Apache Corp (APA), ConocoPhillips (COP) and EOG Resources (EOG) in North Dakota will prove to be equally productive north of the U.S. border.
While the Canadian government has seen fit to block offers by foreign state-owned Enterprises with limited investment in the Canadian hydrocarbons business, such as Petronas' offer for Progress Energy Resources (PRQNF.PK), acquisitions by corporations with Canadian subsidiaries with a long investment history are more likely to succeed.
According to Celtic's press release, Exxon Canada will acquire all of the outstanding shares of Celtic in a transaction valued at $3.1 billion. The prize?
221,000 hectares in the Montney formation and 42,000 hectares in the Duvernay shale. Interestingly, both plays are gas-dominant. Celtic presently has 19,406 boe/d, of which only 21% was oil. The company has extensive production "behind pipe" however, that will increase the oil and liquids ratio.
Exxon's interest is obviously in the extensive undeveloped land package and their coverage of the under-explored Duvernay formation, which are anticipated to be rich in liquids and oil.
Celtic's stock appreciated on the news by a whopping 45% the day after the announcement. Which has investors looking around frantically for who could be next. Certainly the Exxon-Celtic deal has focused the attention of private equity and institutional investors throughout North America on the vast shales of Alberta.
At the same time, major oil and gas producers - and even mid-tier ones - are searching high and low for companies that they could acquire that will give them a seat at the shale oil table. There are two options for would-be participants. If your pockets are deep, and your risk tolerance low, the only option is to acquire an advanced explorer and producer like Celtic. But there are not a great many options out there for that kind of scale. And there aren't a huge number of players who can write a check for $3 billion.
So both investors and producers want to know - "Who's next?"
According to a Reuters report on October 22nd:
"Investors are scouring the sector for clues on the next target, although Ottawa's 11th hour rejection of a bid for Progress Energy Resources by Malaysia's Petronas adds a huge new element of risk to the equation."
Stormhold Energy Ltd.: 295 Sections
There are a large number of private companies operating throughout the Alberta and British Columbia shale oil patch. But they are characterized typically by having relatively small land holdings.
One private company that is seeking capital and a potential public listing in 2013 also happens to have the largest land package in the shales in Alberta of any non-public company - Stormhold Energy Ltd.
Based in Calgary Alberta, the company controls 295 sections in a large land position that starts a two hour drive north east of Calgary. The company owns the rights to stacked zones including the Viking, Mannville, Second White Specks, Banff, Bakken-Exshaw, Leduc, Nisku, Stettler, Beaverhill Lake and Deadwood zones. (click here to see image of lithological zones). The company has four wells drilled and nearing completion, which will see a substantial rise in the price of the company's land holdings.
Management bought the land position in 2009 before the horizontal multi-frac drilling phenomenon had become a widespread application in the exploitation of oil-bearing shales for $1.9 million. The land position alone today is valued at $54 million based on land auction prices in September 2012.
So far the company has not started commercial production, but with 4 wells nearing completion, and oil confirmed in all four wells, its just a matter of time.
"We're in the process of capitalizing a completion and exploration program, as well as having discussions with major oil producers who are looking at our land position and seeing the potential," says Stormhold CEO Chadd Radke. "We expect to complete 4 wells in early 2013, as well as announce a JV with a major. But we are also open to a compete buyout."
For foreign oil and gas operators, acquiring smaller companies that are pre-production but with large landholdings are more likely to pass muster with Industry Canada.
Other Public Company Targets
There are a lot of options for major companies seeking more advanced scenarios at this point, though the completion of the Exxon deal could trip a buying spree that could see many of these junior producers get swallowed up.
Among the contenders:
Encana Corp. (ECA) tops the list of theoretical takeouts by companies in the same tier as Exxon. With a market cap above CA$16 billion, the price tag would be hefty. Encana produces more than 30,000 boe per day of oil and natural gas liquids, as well as 2.9 billion cubic feet per day of natural gas.
Analysts following Encana are skeptical, however, citing the recent resistance to the acquisition of larger Canadian companies. Technically, Exxon Canada, which is acquiring Celtic, is a Canadian company.
Vermillion Energy Inc. (VEMTF.PK), with operations throughout Europe and in the Duvernay play of Alberta, is targeting 50,000 boe per day by 2015, which implies growth of 35 percent from current levels. The company has a market cap of $4.6 billion.
Arc Resources (AETUF.PK), operating in Alberta and British Columbia, could find itself the subject of acquisition interest by a major or super-major like Exxon, in view of its status as one of Canada's largest conventional oil and gas companies with an enterprise value of approximately $8 billion. ARC expects 2012 oil and gas production to average 91,000 to 94,000 barrels of oil equivalent per day from its properties in western Canada.
Major Shift Underway in North America
The expectation that Canada's oil sands would become the next major oil play in the world is running into certain realities. With the global economy heading towards a strengthening recession, oil demand, and subsequently, oil prices, are seen weakening in the long term. If shale oil, gas and liquids can be brought on-stream with far superior economics to oil sands that could be the wrench in the works that sees continued oil sands investment veer towards shales. Certainly, that is the pattern evolving, if takeover bids like those seen recently are successful.
At the same time, Exxon, which is generally acknowledged as visionary in its acquisition strategy, points to growing anticipation that there will be Liquified Natural Gas plants built on Canada's west coast. So the Celtic acquisition could be seen as positioning for that opportunity.