Investors Jostle over the Oil Sands Prize

by: Streetwise Blog

By Andrew Willis

South Korea’s $1.8-billion foray into the oil patch reinforces a long-established trend: Canada’s oil sands will be developed by foreign energy companies.

State-owned Korea National Oil Corp.’s friendly bid for Harvest Energy Trust (HTE) late Wednesday is just the latest in a series of takeovers aimed at building substantial holdings in the reserve rich, but capital-intensive oil sands. However, the deals are getting larger, as smaller plays are picked off, and buyers get comfortable with owning increasingly large properties.

KNOC, as the South Korean oil company is known, is stepping up several notches by acquiring Harvest. It’s only other Canadian acquisition came in 2006, when it paid $270 million for an oil sands property owned by Newmont Mining (NYSE:NEM).

In doing so, it’s buying into region that has already attracted the attention of global players that range from France’s Total to Exxon Mobile (NYSE:XOM) and Royal Dutch Shell (NYSE:RDS.A). (The interesting story here is who does not have a stake in the oil sands: British Petroleum (NYSE:BP) is conspicuous in its absence, a legacy of previous management’s views on this play, and China’s state-owned energy entities are also only minor players.)

The Harvest acquisition offers a simple case study on the dynamics of this sector.

Along with conventional oil and gas properties in western Canada, the trust has oil sands holdings in two areas: Alberta’s Peace River and Cold Lake regions. It would be logical to expect deep-pocketed KNOC to bulk up in both parts of the province, with further acquisitions or partnerships.

All it takes is a glance at Alberta government-supplied maps of these two areas to figure out who else intends to play the energy acquisition game, and who might get picked off.

Royal Dutch Shell, a serial acquirer, dominates the Peace River oil sands. Smaller players in this patch of the province include Baytex Energy Trust (NYSE:BTE) and Penn West Energy Trust (PWE).

Now, this is not a prediction that those two relatively large trusts are going to be taken out in the near future. But the trend is not their friend. Like Harvest Energy, both Baytex and Penn West have no controlling shareholder, and both face the prospect of losing luster as they convert to traditional common stock companies.

Move to Cold Lake, and once again, the global energy giants have staked claims, and there are smaller domestic companies in the mix. Imperial Oil, the domestic arm of Exxon Mobile, has a massive stake, along with Royal Dutch Shell.

At the other end of the spectrum is Bonavista Energy Trust (OTCPK:BNPUF), with five separate properties in the Cold Lake region, and one of the largest independent domestic energy companies, Canadian Natural Resources (NYSE:CNQ), with 26 properties in the area.