• Blackstone, KKR, others seen cross-border shopping
• Trans Mountain pipeline expansion, LNG plant could bolster investments
• Overseas strategics pulling back, making space for PE

Buffeted by intense competition in their home market, US private equity firms specialized in the energy sector are turning their sights to Canada, market participants said.

“As (US) shale has started to mature, and it’s harder to find Tier 1 acreage, folks are dusting off older playbooks, and one of those is Canada,” said Dan Pickering, chief investment officer at Pickering Energy Partners.

It is only natural for US-based firms to evaluate assets north of the border, given the heated competition for assets south of the border, said John Mercury, executive chair and chair of the board at Canadian law firm Bennett Jones. While US financial investors have always been active in Canada’s energy sector, their activity slowed down appreciably following the 2014 oil price crash. That trend is now reversing.

A number of US-based infrastructure and energy-oriented private equity firms, such as Blackstone [NYSE:BX], KKR [NYSE:KKR], and Carnelian Energy Capital, are actively scouting Canada for investment opportunities, he said.

NGP Energy Capital and Quantum Energy Partners are also trolling around Canada, said the managing director of a Canada-focused energy investment firm.

The recent completion of the Trans Mountain pipeline expansion, which will increase the amount of oil transported from Alberta, Canada’s energy province, to refineries and terminals in British Columbia and Washington State, as well as the building of the country’s first liquefied natural gas (LNG) plant, which is expected to become operational in mid-2025, has improved the investment climate of Canada’s energy sector, Mercury said.

The CAD 34bn (USD 24.9bn) Trans Mountain expansion, which became operational on 1 May and tripled pipeline capacity to 890,000 barrels per day, is expected to narrow the price differential between Canadian oil, which historically has been bottlenecked in Alberta due to lack of available space on export pipelines, and the West Texas Intermediate (WTI) US benchmark, said Robert Froehlich, partner, Canadian head of energy and the local chair of the Calgary Business Law group at Norton Rose Fulbright.

So far, however, the discount on Canadian thick and sour oil has widened to about USD 22.53 a barrel below WTI, versus USD 14.48 in April, a month before the Trans Mountain expansion came into operation. Two major shippers on the expanded pipeline, Cenovus Energy [TSX:CVE] and Canadian Natural Resources [TSX:CNQ], blamed increased competition from Mexican heavy crude imports and US refinery outages.

And yet, the Montney Basin, which straddles British Columbia and Alberta; the smaller Duvernay Basin; and potentially the tight natural gas Deep Basin represent lower-valuation alternatives to the highly competitive Permian Basin, said Froehlich, adding that some PE clients are starting to ask about Canadian targets. “It’s still early stages,” he said.

The Montney and Duvernay shale basins also have longer runway that the Permian Basin, said the managing director of the Canada-focused energy investment firm.

Canada has some shale basins that are providing attractive returns, and it is less competitive, said Pickering. “I think we’ll see more public cross-border activity. But right now, the private equity guys are moving quicker,” he added.

However, there are few remaining large targets available in those two basins following a flurry of consolidation over the past decade, which means that US PE firms will likely go after small or mid-sized targets or assets being offloaded by oil majors, said Froehlich. Chevron [NYSE:CVX], for instance, is marketing Duvernay shale assets as it streamlines global operations following several big acquisitions. The assets could fetch up to USD 900m, Reuters reported, citing estimates from Energy Advisors Group.

Mergermarket reported in April that Calgary, Alberta-based Paramount Resources [TSX:POU] was interested in Chevron’s Duvernay assets.

Tourmaline Oil [TSX:TOU], for its part, is also selling the Duvernay assets it acquired when it took over Bonavista Energy.

The Duvernay has seen a recent uptick in M&A activity. Last September, Murphy Oil [NYSE:MUR] sold a portion of its Duvernay assets for USD 112.3m and Athabasca Oil [TSX:ATH] and Cenovus in February completed the spin out of their Duvernay-focused joint venture Duvernay Energy. Athabasca owns a 70% stake in the JV and Cenovus owns the remaining 30%.

US PE firms’ renewed interest in Canada’s oil and gas sector comes after a handful of international companies exited or reduced their presence in the country. In 2021, Japan Petroleum Exploration [TYO:1662] sold its 75% working interest and operatorship in the oil sands Hangingstone Expansion site. A year later, Spain-based Repsol [MA:REP] offloaded oil and gas-producing land in Alberta to Teine Energy and Paramount Resources. In 2023, UK’s BP [LON:BP] sold its 50% non-operated interest in the Sunrise oil sands project to Cenovus and last year France’s TotalEnergies [NYSE:TOT] divested its Canadian operations to Suncor Energy [NYSE:SU].