By Nia Williams and Euan Rocha
CALGARY, Alberta, Feb 9 (Reuters) - Faced with record low
prices for heavy crude, Canadian energy companies are
sacrificing other parts of their business to keep higher-cost
oil sands production going and safeguard the billions already
invested in these multi-decade projects.
Companies including Husky Energy Inc HSE.TO , MEG Energy
Corp MEG.TO and Pengrowth Energy Corp PGF.TO are selling
assets or slowing light and conventional oil exploration and
production, even as they forge ahead with oil sands projects
that are in many cases bleeding money on every barrel.
Although the move to support higher-cost production seems
counterintuitive, oil sands companies take a longer-term view
that shutting plants in Alberta would be very expensive and risk
permanently damaging carefully-engineered reservoirs,
underground deposits of millions of barrels of tarry bitumen.
It is easier, and cheaper, to shut down and later restart
conventional wells. L1N11A1VA
Producers are also betting that oil prices will eventually
recover. The latest Reuters poll of oil analysts forecasts the
U.S. benchmark CLc1 will average $41 a barrel in 2016, a level
where most Canadian oil sands projects can break even. OILPOLL
Bankers say the need to bolster balance sheets and cover oil
sands losses will boost the number of Canadian energy deals this
year, particularly sales of pipelines, and storage and
processing facilities. L2N15L0LC
"The market was down significantly last year in terms of
energy M&A, and we think that's going to reverse," said Grant
Kernaghan, Canadian Investment Banking head for Citigroup (N:C).
CORE BUSINESS
MEG is selling its 50 percent stake in the Access pipeline,
which analysts value at around C$1.5 billion ($1.08 billion),
while Husky is selling a package including 55,000 barrels of oil
equivalent per day of oil and natural gas production, royalties
and midstream facilities, valued at between C$2.4 billion to
C$3.2 billion. L2N15K2EI
According to a recent TD Securities report, virtually no oil
sands projects can cover overall costs, including production,
transportation, royalties, and sustaining capital, with U.S.
benchmark crude below $30 a barrel CLc1 .
The benchmark heavy Canadian blend, Western Canada Select
(WCS), now trades around $16.30 a barrel, just a few dollars
above record lows hit in January.
But as nearly 80 percent of oil sands costs are fixed
investments, such as equipment for injecting high-pressure steam
underground to liquefy tarry bitumen, producers prefer to have
some revenue coming in to help offset those costs than none,
said FirstEnergy (N:FE) Capital analyst Mike Dunn.
To be sure, if WCS prices dropped even further to below $12
a barrel, Dunn said producers may look at ways to trim
production by 10-30 percent.
Oil sands "remains our core business so we will look to
various other handles we have to support that business," said
Brad Bellows, a spokesman for MEG.
Even as it makes major cuts, Husky is ramping up new thermal
projects, including its Sunrise joint venture with BP BP.L .
Sunrise in northern Alberta took three years and C$2.5 billion
to build and Husky is in the midst of the two-year process of
raising reservoir pressure to full production capacity. Once
there, Sunrise is expected to produce for 40 years.
As well as selling assets, some players, such as Canadian
Natural Resources Ltd CNQ.TO and Baytex Energy BTE.TO are
shutting in uneconomic conventional heavy oil wells, but leaving
their oil sands operations intact.
JEWELS IN THE CROWN
Bankers say that midstream assets - pipelines, storage and
processing facilities - prove popular with buyers such as
pension funds and private equity firms, which favor investments
with stable cash flows that are relatively easy to value.
"They're to a certain extent the jewels in the crown. These
companies would not be looking to sell them if they could get
away with not doing it," said Citi's Kernaghan.
Last year, oil sands producer Cenovus Energy CVE.TO sold a
portfolio of oil and gas royalty properties to Ontario Teachers'
Pension Plan for C$3.3 billion.
Industry veterans note oil sands operations also had to be
"cross-subsidized" by healthier parts of the business during the
last prolonged market slump in the 1980s and predicted producers
would push to keep operating until prices recover.
($1 = 1.3930 Canadian dollars)
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
FACTBOX-Midstream, conventional plays being sold by Canadian oil
sands players L2N15L0LC
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>