TD Securities oilsands investment head Robert Mason on the next wave of oilsands development

Oilsands Review — Oilsands companies looking for financing know TD Securities very well. Over the last 10 years, the firm has been a leader in raising equity and debt capital for oilsands companies and advising them on mergers and acquisitions (M&A). Robert Mason joined the company’s oilsands group in 2000 and now leads it. Recently he sat down with Oilsands Review to talk about what the sector can expect in the near term.

OSR: How would you characterize what the oilsands industry will see in 2010?

RM: Things definitely feel a lot better than they did a year ago at this time. Assuming the price of oil continues to vacillate in the US$75–US$85 per barrel band, which is where it has been for the last number of months, there will certainly be some amount of equity financings by the developing players. The market will continue to be selective in the opportunities it is willing to finance, however. Things that could lead to stronger activity levels include higher commodity prices, continued evidence of costs coming down, and/or more M&A speculation coming back to the market.

OSR: What do you anticipate in M&A activity for this year?

RM: The equity market is still skeptical about whether it should factor M&A activity into its valuations, as it used to do back in 2005–2007. There weren’t very many deals last year, basically only four transactions announced, and all were done at lower prices per barrel than in recent years. I think M&A activity will continue at a measured, sporadic pace as opposed to a flurry of deals. You will also likely see at least one or two international majors not yet in the space to make an entry.

OSR: What do you see for the future of the oilsands junior?

RM: With what’s happened to the cost of capital for development-stage players, it clearly looks like the oilsands is trending towards a game of bigger companies. That doesn’t mean there isn’t room for development-stage companies, just that it will be more difficult to finance their projects. To be successful they will need either a technological edge, a strong management track record, or an above-average asset. The market will generally award much higher valuations to companies that have production and cash flow, as we have seen recently with Southern Pacific post their acquisition of Senlac.

OSR: Have we seen the last of the oilsands megaproject?

RM: Clearly there has been a recent movement towards smaller projects in an effort to control costs. You’ve seen that with Canadian Natural Resources and Suncor—both are talking about doing future expansions in smaller pieces. All the majors are quite apprehensive about returning to the situation where multiple megaprojects were going on at the same time. Imperial Oil is going ahead with Kearl, and that is a megaproject, but they are doing so with the knowledge that it is unlikely that any other megaprojects will be competing with them in the next two to three years for skilled labour. Also, many of the megaprojects on the books were those involving upgraders,  and new upgrader development in Alberta has essentially come to a stop. An obvious wildcard in that area depends on what happens with the bitumen royalty-in-kind process [with the Alberta government].

OSR: Are you seeing the market being affected by environmental concerns relating to the oilsands?

RM: Reducing the environmental impact of their projects is a key focus of all developers, large and small, and this obviously costs money and reduces already tight profit margins. One of the reasons why it is harder to raise equity capital for development-stage companies today is due to the increased uncertainty of the costs of development—and one of the biggest uncertainties is what it will cost to meet future greenhouse gas emissions rules. The United States and Canada are still a ways away from announcing what those rules are going to be. Certainty would be helpful in some degree, and if the ultimate regulations are more onerous than people in general are assuming they would be [say a few dollars per barrel], that will act to obviously further slow down the pace of development.

OSR: Is the oilsands industry itself ready for another boom?

RM: The costs were escalating so quickly in late 2007 and early 2008 that it was clear a slowdown was going to happen even if the financial crises hadn’t occurred and oil prices corrected downward. Cost inflation was so strong, and that, coupled with the new Alberta royalty regime, meant that many of the projects were not going to be economic to build, even with $100–$120 per barrel oil prices. Most of the large companies realize that if the price spikes up again, trying to develop too many of these projects simultaneously will destroy the economics for everyone. So I don’t think we’ll ever return to such a superheated pace of development, and if/when oil prices do spike up again the pace will be more measured.