Is China’s Energy-Company Buying Spree Over in Canada?

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By Marin Katusa

On Valentine’s Day, as restaurants were filled with lovey-dovey couples and flower shops rushed to fill last-minute orders, Encana executives had one of the most embarrassing days in the company’s history, as revealed in a conference call.

Encana definitely did not have a good year – in the face of low natural-gas prices, Canada’s largest natural-gas producer had to take severe write-downs on its projects. The final numbers were not pretty, recording a loss of $2.8 billion for 2012. The market did not take the news well, taking the stock down 6% on the day.

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But that was not even the worst part of the call.

During one part of the call, Canaccord analyst Phil Skolnick asked a very reasonable question: “Do you think that [the new regulations in Canada - you can read about them in our Additional Links and Reads] prohibit a company like Encana from being acquired?,” to which the CEO replied, “The answer is no.” One of the Encana executives then muttered, “F****** a******” – under his breath, yet clearly audibly during the conference call, obviously annoyed by the question.

Encana is now working tirelessly to keep this PR nightmare under wraps, with its spokesman apologizing, stating that “Something like that should have never been said, and we’re very sorry about it.”

We would like to give them the benefit of the doubt – I mean, who doesn’t have a bad day at the office on occasion? But it’s hard for us to ignore the unprofessionalism; and it reminds us of another time when management of another company were noticeably annoyed by analyst questions during a conference call. But could they be hiding something more sinister; and is this just a sign of the high levels of frustration Encana executives have at present?

We say this because this type of faux pas during a conference call has happened before… at Enron, the American energy company which crumpled under the most notorious accounting scandal in the history of the USA.

On April 17, 2001 on an Enron quarterly conference call, Highfields Capital analyst Richard Grubman made a very reasonable statement, “You’re the only financial institution that can’t produce a balance sheet or cash flow statement with their earnings.” Enron had been using some very “innovative” accounting in order to amplify its earnings… and it wanted to keep everyone else as much in the dark as possible about the shady dealings.

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In what is one of the most memorable quotes in finance history, then-CEO of Enron Jeff Skilling (currently still incarcerated) replied, “Well, uh… thank you very much. We appreciate it. A******.”

Sounds like Enron had good reason to deflect Grubman as much as possible.

Did the individual at Encana want to avoid Skolnick’s question?

What does this mean?

What if Phil Skolnick has a point, and large Canadian companies no longer have the chance to sell themselves to China and India?

What if Encana is hiding something even larger than this? Perhaps its 2013 guidance numbers are already way off the mark, or management knows that the company has to make even more painful write-downs (something that we have warned about many times before).

What if this is the beginning of the end for Encana… and for many other natural-gas companies?

And the most important question for investors – who will be able to not just survive, but thrive in this environment?


Additional Links and Reads
Canadian PM Vows That Chinese Takeover of Nexen “the End of a Trend” (The Star)

The news itself is old, but the question asked by Phil Skolnick is based on Stephen Harper’s comments contained within the article. After Ottawa approved the takeover of Nexen Inc. by Chinese company CNOOC, Harper stated that large acquisitions such as these will now face further scrutiny, as he doesn’t want Asian companies to begin buying up all the Canadian oil-producing companies. This has very far-reaching implications and could drastically reduce the number of large Canadian companies being bought moving forward.

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Ukraine Wields Natural-Gas Trump Card in Brussels (Deutsche Welle)

Energy security has become one of the most important topics for countries in the past decade. The countries that have the energy supplies are able to leverage their advantages for much more leeway when it comes to political oppression, censorship of free speech, and human rights violations. The recent EU-Ukraine meeting demonstrated the extent to which European countries are willing to overlook Ukraine’s problems in exchange for natural gas. Such is the way the world is.

Nigeria Losing Ground in Changing Oil World (Reuters)

Though Nigeria has one of the largest oil industries in the world, it has been plagued by years of mismanagement, stagnation, and corruption. If this trend continues, Nigeria will be at risk of being left behind. Other countries such as Venezuela and Iran are facing similar problems – so much money has been spent by the government on themselves as well as fuel subsidies that they have done a terrible job of reinvesting in their energy infrastructure. Given how dependent they are on the production of energy right now, any decline could spell trouble for these countries. This could, in turn, lead to social unrest and major upheavals. We believe that it is very likely for Nigeria to be the first of many countries to fall into this predicament.

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avatarDoug Casey - Casey's Daily Dispatch posted Tuesday, February 26th, 2013.

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