As Sun Sets on Canada Energy, Grafton Eyes Renewables

Grafton Asset Management Inc., a firm that has brought foreign investment into Canada’s oil and gas industry, is looking to add alternative energy to its portfolio for the first time as it positions itself for the decline of fossil fuels.

“I’m worried about the future of the industry in general,” Geeta Sankappanavar, president and chief operating officer of the Calgary-based investment firm, said in a phone interview on Tuesday. “It’s going to be a great business for a period of time, but I do look at it as a sun-setting business — one where we’ll see competition and disruption from outside our industry.” 

Oil and gas companies have had to cut investment and fire workers to weather the worst price crash in a generation. As crude rebounds after the Organization of the Petroleum Exporting Countries and other major exporters pledged to cut output, some producers like Cenovus Energy Inc. are resuming expansion plans. But prices are still half their peak level in mid-2014.

Sankappanavar expects the oil and gas industry’s recovery to be muted compared with previous cycles and is looking at financing more environmentally friendly and renewable power projects across Canada, including natural gas plants and biomass facilities. The company plans to attract capital from global investors to diversify its asset base. A majority of Grafton’s capital comes from the Middle East, Europe and the U.S.

Healthy Performance

Grafton has about C$1 billion ($750 million) in assets under management, of which C$900 million is focused on direct investments in the Canadian oil and gas sector and the remaining C$100 million is invested through its Grafton Energy Opportunities equity fund. The fund returned 65 percent last year through November, according to preliminary, unaudited figures from the company. That’s more than double the 30 percent gain for the S&P/TSX energy sector index over the same span.

The firm’s equity portfolio includes oilfield services provider Canyon Services Group Inc. and producers Kelt Exploration Ltd. and Seven Generations Energy Ltd. Seven Generations more than doubled last year, while Canyon and Kelt rose 73 percent and 60 percent, respectively.

Canyon fell 0.3 percent to C$7.37 at 11:23 a.m. in Toronto. Kelt gained 4.1 percent, while Seven Generations dropped 2.5 percent.

While a rebound in oil prices is helping producers emerge from the downturn, selling Alberta’s energy sector to the world remains tricky as the high-cost operations struggle to remain competitive, she said. Uncertainty over Alberta’s tax regime and carbon pricing also deter foreign investors, she said.

“In Alberta, I think we’re going to get the rising tide effect from higher oil prices, but we need to figure out a way to differentiate ourselves in order to attract that investment,” Sankappanavar, 42, said.

Oil majors including Royal Dutch Shell Plc and Statoil ASA have been selling Western Canadian properties to focus on more profitable prospects elsewhere.

Firm’s Strategy

Grafton has stayed away from investing in assets that are already producing. Instead, the firm’s strategy is to look for those that look promising for what they hold below ground, even if projects face challenges and would take three to five years to start output.

The company has a partnership with Tourmaline Oil Corp. and owns 25 percent of the producer’s Peace River High project. It also has a joint venture with Bellatrix Exploration Ltd. and holds assets in the Montney, a shale formation straddling Alberta and British Columbia.

“We’re still in the first inning of a nine-inning game,” Sankappanavar said. “I’m positive on the outlook of capital and the industry for the next 12 months, but you take a little bit longer and you start to worry.”

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