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Oil producers bank on homegrown push to drive competition

Pipes that carry hot steam to well heads at Cenovus Energy's oil sands operation in Christina Lake, Alberta, Canada.

RICHARD PERRY/NYT

Canadian oil producers are confident in Alberta's oil sands projects as a long-term play, betting that consolidation and a homegrown focus will drive down operating costs and make the industry more competitive as foreign players retreat.

Brian Ferguson, chief executive officer of Cenovus Energy Inc., which last month announced a $17.7-billion deal for ConocoPhillips Co.'s oil sands holdings and other Canadian assets, told reporters Tuesday that the pending acquisition gives Cenovus "complete control of our future in the oil sands."

Working in the recent low-oil-price environment has helped Cenovus become more efficient in its cost structure, Mr. Ferguson said. The company is now trying to find more efficiencies by embracing big data and automation.

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As such, "we're well-positioned now to become the sole owner of these great oil sands assets," Mr. Ferguson said. He made the comments on the deal, his first in public since a conference call following the announcement, at the 2017 Canadian Association of Petroleum Producers Scotiabank Investment Symposium in Toronto.

The conference comes at a major juncture for Canadian oil production, as companies such as ConocoPhillips and Royal Dutch Shell PLC exit the oil sands, and Canadian businesses including Cenovus and Canadian Natural Resources Ltd. buy up their stakes. This has helped to repatriate the world's third-largest crude deposit, but in some cases disappointed the market; Cenovus shares tumbled sharply after it announced its deal with ConocoPhillips. On Tuesday, executives and observers piled on the message that despite global producers' shifting focus, Canada's oil projects should be strongly positioned, particularly in the medium and long term.

They have yet to assuage all concerns about the shift, though. Cenovus is funding its deal – the oil sands' biggest to date – with $10.5-billion in loans and has issued $3-billion in shares in a bought deal at a price of $16. Shares remain below that level, at around $14.75 on Tuesday afternoon.

Mr. Ferguson played down concerns about the debt financing, pointing to Cenovus's investment-grade ratings from Standard and Poor's, DBRS and Fitch; he said the company has 75 per cent of the permanent financing in place as of last Friday.

To help deleverage Cenovus's balance sheet, the company plans to divest $3.6-billion of assets from its existing conventional portfolio. Mr. Ferguson says he's already fielded many calls from investors interested in the assets.

"We did a 10-, 20- and 30-year unsecured-note financing last week, which was oversubscribed, so the credit side of the debt-capital markets is very supportive of the transaction," he said, noting that the company should be able to "comfortably" complete its divestiture bridge in 18 to 24 months.

Asked about fears of further falling oil prices after the deal, Mr. Ferguson said the company is keeping $1-billion in cash, and has $3-billion available in its revolving debt, giving it a "strong contingency" in a low-price environment.

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Global energy-research firm Wood Mackenzie has estimated that more than 70 per cent of oil sands production is now split between four producers: Cenovus, CNRL, Imperial Oil Ltd. and Suncor Energy Inc.

Last month, CNRL bought assets from Shell and Marathon Oil Corp. for $8.5-billion (U.S.) in cash and shares to give it a controlling stake in the Athabasca oil sands project.

Steve Laut, CNRL's president, told reporters Tuesday that where international companies might get frustrated with the oil sands – thanks to complicated extraction coupled with environmental, employment and safety standards – Canadian companies' shareholders should take solace that national familiarity can help them win the long game.

"We can still have all these high standards that we have here in Canada, but be much more effective and efficient," Mr. Laut said. He said he also expects steady oil prices, in the $50-to-$60 range, to help stabilize operations.

Robert Johnston, chief executive of the Eurasia Group, a leading global political-risk consultancy, said he expects to see the global oil market in a deficit in three to four years, with Canadian production looking more attractive as a result.

Foreign-owned companies, he said, are looking to deep-water plays for long-cycle investments amid emissions concerns in the oil sands. But there's also the issue of focus: "It's something you really have to be in, specialized in, and focused on technology. Make it a major strategy, a focal point; it's too expensive and capital intensive to be a side project," he said after a speech at the CAPP conference Tuesday.

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"I think Cenovus is a company that will be very focused on, 'How do we make this particular resource work?' as opposed to 200 other plays around the world," Mr. Johnston said.

At a CAPP seminar earlier Tuesday, Suncor Energy Inc. executive vice-president and chief financial officer Alister Cowan said the consolidation of projects in the oil sands – such as its recent move to deepen its investment in the Syncrude mining and upgrading project – will help drive down operating costs and make the region more competitive.

"Being able to increase [Suncor's stake] at a very good price last year was, we thought, a great deal, and we've seen others take that strategy," Mr. Cowan said, referring to the recent deals by Cenovus and CNRL.

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About the Author

Josh O’Kane is a reporter with The Globe and Mail's Report on Business. Since joining the paper in 2011, he has told stories from New Brunswick to Nairobi. More

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