Buyout Bait in Canada’s Energy Supermarket

The world's energy majors are flocking there for resource deals

It seems our neighbors to the North have become a prime destination for energy firms looking to do a little “shopping.” It’s easy to see why.

With its vast shale fields, oil sands and conventional petroleum resources, Canada accounts for over 90% of all proven energy reserves outside OPEC. At the same time, its politically friendly environment — Prime Minister Steven Harper continues wave his “open for business” sign — and vast infrastructure network make it an ideal place to pick up major reserves easily.

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However, those making the buys aren’t just the usual suspects.

Sure, China and the U.S. are making deals, but countries from France to Norway and even Malaysia have flocked to the land of Maple Leafs to secure these lucrative hydrocarbon resources.

With the deals continuing to grow in both price and frequency, retail investors have plenty of opportunity to profit from all that activity.

A String of Big Deals

The latest blockbuster deal underscores why oil majors looking to build out their portfolios in unconventional resources are heading to Canada.

Fresh off of its $2 billion drilling rights purchase from Denbury Resources (NYSE:DNR), integrated giant Exxon Mobil (NYSE:XOM) has just agreed to pay $2.91 billion for Canada’s Celtic Exploration. The 35% premium that Exxon is willing to pay gives it access to roughly 545,000 net acres in the Montney shale and 104,000 acres in the Duvernay.

These fields are rich in oil and gas that need to be extracted by horizontal drilling and hydraulic fracturing, which are the specialty of Exxon’s XTO unit. Overall, the purchase will add 72 million cubic feet of natural gas a day and 4,000 barrels a day of oil and natural gas liquids production to Exxon’s total.

Exxon’s bid for Celtic is the latest in a wave of foreign takeovers in Western Canada’s energy-rich provinces of Alberta and British Columbia.

The Canadian government is still currently reviewing Chinese state-owned oil firm CNOOC’s (NYSE:CEO) $15.1 billion bid for Nexen (NYSE:NXY). That deal was one of the largest purchases yet by a Chinese firm in Canada. However, collectively — including the Nexen-CNOOC deal — Chinese firms have spent roughly $49 billion buying Canadian energy assets over the last few years.

But China and the U.S. aren’t alone in wanting Canada’s black gold.

Malaysia’s state-owned Petronas recently bid $5.2 billion for Progress Energy Resources (which is still under review), while France’s Total (NYSE:TOT) has been making deals in the nation’s oil sands for years. Likewise, state-owned Korean National Oil Co. paid $4.1 billion for Harvest Energy Trust back in 2009. KNOC is rumored to be sniffing around the Canadian oil patch for more bitumen exposure and another multibillion buyout.

Perhaps the most interesting deal is that oil-rich Kuwait, through its large state-owned oil firm, has made a preliminary deal with Athabasca Oil (PINK:ATHOF) to gain access to oil sands acreage. These major deals don’t even include the numerous smaller and private transactions occurring across Canada’s shale and oil sands reserves.

As Exxon and other global majors struggle to boost output amid rising future demand, Canada simply remains one of the best places to obtain those resources because other vast energy reserves are mostly located in tightly controlled by countries like Brazil and Russia.

Buys in Aisle One

Given that Canada is and will be such a major source of energy supply and future M&A, investors may want to add exposure to the nation. The sheer size of the CNOOC-Nexen deal puts almost the entire Canadian energy sector on the buyout radar. However, mid-cap Talisman (NYSE:TLM) could be the next to go.

The company, which produces oil and gas in North America, the North Sea and Southeast Asia, has struggled over the last few years. Like Nexen, Talisman has been consistently criticized by analysts and investors for having operating problems and for missed production targets. That’s caused its shares to languish.

Featuring a relatively small market cap of $13 billion and a joint venture with China’s Sinopec (NYSE:SNP), which bought a 49% stake in Talisman’s North Sea assets the same day CNOOC announced its bid for Nexen, Talisman could get a full buyout offer at any moment.

Another interesting target could be careworn Husky Energy (PINK:HUSKF). The firm is an integrated energy giant that ranks among Canada’s largest petroleum companies in terms of production. Not only is Husky active in Western Canada by producing oil, natural gas and natural gas liquids from unconventional fields, it also operates both oil and natural gas fields off the Chinese coast. That includes three major natural gas fields in the South China Sea with partner —  you guessed it — CNOOC.

While buying out Husky would be a much larger undertaking than Talisman, it’s certainly doable considering a CNOOC would have the backing and checkbook of the Chinese government.

All in all, the world’s energy superpowers are likely to keep heading to Canada to meet their energy needs. That trend is even likely to intensify as hydrocarbon resources become scarcer. Both Talisman and Husky are interesting picks — as is the broad Guggenheim Canadian Energy Income ETF (NYSE:ENY)  — on playing the world’s energy supermarket.

As of this writing, Aaron Levitt is long ENY.

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