Investors should watch out for emotion-driven selling in the wake of new Canadian government guidelines, Canaccord Genuity warns.
Beaten down Canadian oil sands stocks were pummelled again this week following the release of the Canadian government’s new guidelines for investments by State-Owned Enterprises (SOE), says Canaccord Genuity.
Announced on December 7, 2012, the new guidelines suggest that future approvals of SOE takeovers of control of oil sands assets will be exception rather than the rule, the investment firm said in its Morning Coffee newsletter.
“Let me be clear. When we say that Canada is open for business, we do not mean that Canada is for sale to foreign governments,’’ said Prime Minister Stephen Harper in a December 7 speech.
He was commenting after ending months of uncertainty by approving a $15.1-billion foreign takeover bid of Calgary-based Nexen Inc. (TSX: T.NXY, Stock Forum) (NYSE: NXY, Stock Forum) by the China National Offshore Oil Co., or (CNOOC)(NYSE: CEO, Stock Forum), as well as Petroliam Nasional Bhd.’s $5.2 billion takeover of Progress Energy Resources Corp. (TSX: T.PRQ, Stock Forum).
Harper went on to add that the Canadian government is uncomfortable about SOEs taking direct control of oil sands. This is an indication in Canaccord’s view that takeovers of oil sands companies by SOEs are highly unlikely going forward.
In his speech, Harper said the law requires that the government consider each case on its own merits according to broad criteria. But in light of growing trends, and following decisions made last week, the Government of Canada has determined that foreign state control of oil sands development has reached the point at which further such foreign state control would not be of net benefit to Canada, he said.
“Therefore, going forward, the Minister (of Industry) will find the acquisition of control of a Canadian oil sands business by a foreign state-owned enterprise to be a net benefit, only in an exceptional circumstance,’’ Harper added.
Canaccord Genuity Oil & Gas analyst Phil Skolnick says the one silver lining is that the revised rules don’t mention specific objections towards non-SOEs acquiring controlling interests in oil sands (but they will be scrutinized under the net benefits test).
Nevertheless, the perceived high bidder (i.e., the SOE) is now being removed from the corporate acquisition market.
Consequently, while Skolnick believes there was minimal take-out value in Athabaska Oil Corp. (TSX: T.ATH, Stock Forum), Canadian Oil Sands Ltd. (TSX: T.COS, Stock Forum), Connacher Oil and Gas Ltd. (TSX: T.CLL, Stock Forum), MEG Energy Corp. (TSX: T.MEG, Stock Forum), Southern Pacific Resources Corp. (TSX: T.STP, Stock Forum), SilverWillow Energy Corp. (TSX: V.SWE, Stock Forum), before this announcement, he anticipates near-term emotion-driven selling.
In any case, the new guidelines prompted Canaccord Genuity to lower its target prices for these stocks by an average of roughly 10%.
For instance, the revised target for Canadian Oil Sands is now $20, down from $22. The stock closed Wednesday at $19.75, leaving the company with a market cap of $9.57 billion, based on 484.5 million shares outstanding. The 52-week range is $25.19 and $18.21.
The new target for Athabaska Oil is $15, down from $16.50. Athabaska Oil traded Wednesday at $9.70, leaving the company with a market cap of $3.8 billion, based on 399.8 million shares outstanding. The 52-week range is $14.05 and $9.77.
Canaccord’s revised target for Connacher Oil is 40 cents, down from 50 cents. Connacher was unchanged Wednesday at 22 cents, leaving the company with a market cap of $99 million, based on 449.3 million shares outstanding. The $52-week range is $1.19 and 21 cents.
The target for MEG Energy has dropped to $47 from $50. MEG traded Wednesday at $32. The company has a market cap of $6.26 billion, based on 195.6 million shares outstanding. The 52-week range is $47.11 and $32.16.
The new target for Southern Pacific Resources is $2.25, down from $2.50. Trading at $1.28, Southern Pacific has a market cap of $508.7 million, based on 397.4 million shares. The 52-week range is $1.92 and $1.13.
The revised target for SilverWillow Energy is $1.35, down from $1.50. Trading at 79 cents on Wednesday, SilverWillow has a market cap of $44.8 million, based on 56.6 million shares outstanding. The 52-week range is $1.64 and 74 cents.