Notes for Toyota Tsusho and Encana – second round
Teaching notes
A primary learning goal in this case is to research complex issues deeply in order to create new value opportunities.
The world of gas and oil in North America is a complex one. This simulation requires students to read deeply in order to reject some of the red herrings in the general and confidential information. Some of these include:
-
Avoiding gas other than dry CBM gas
-
Avoiding infrastructure projects
-
Entering into power generation
Complexity is a feature of this simulation, so students will need to understand the relationships among the measuring units (BTU, cubic feet, BBL, etc.), among the larger oil and gas companies (Encana, Imperial, Shell, etc.), and the various plays (Horseshoe, Duvernay, Bakken, etc.), well costs, and so on. Prices, technology, and geopolitics all play a role, so students need to rely on current information from reputable internet sources.
Students should check and update all points of information.
Win/fail criteria
If Toyota Tsusho pays Encana more than the Henry Hub price for gas during the years before Kitimat (or other) liquefaction projects are completed, it will lose money primarily because the gas will not be saleable in Japan until the ship loading facilities in North America are completed. Completion of those facilities will radically change prices in North America (upward) and in Japan (downward). The smallest and fastest liquefaction plant, the floating BC LNG project, may be working in 2016, but it will not have high capacity. The higher capacity projects such as the Apache/Chevron Kitimat LNG plant may be working as soon as 2019 or 2020. In any case, the BC LNG project includes Idemitsu, a Japanese company, which will sell gas in the Japanese market.
Transporting gas or oil to export facilities in the USA is possible, though transmission through the USA and shipping to Asia will not be cheap. Students will be able to estimate the cost of transmission and shipping using information available online. In any case, US export facilities will not be functioning until the 2018–2022 timeframe.
If Toyota Tsusho buys a portion of Prairie Sky Royalty, they must base their price paid on the value of the same percentage of gas in the field. Therefore, the current price of Prairie Sky Royalty shares, the price of that gas and the amount in the field (reserves) should be watched by both parties in the negotiation.
The 2012 agreement saw Toyota Tsusho paying a relatively high price for that gas. More than its sale price in North America in the following year or so. Toyota Tsusho students should not come to a similar costly agreement again!
“The Japanese corporation paid $3.86 per thousand cubic feet equivalent for proven plus provable reserves compared with the investment bank’s 54 cents per MCFE valuation for all of Encana’s proven plus probable Canadian reserves, Potter, with CIBC World Markets, said.”
From the Calgary Herald, www.calgaryherald.com/business/Encana+sells+Horseshoe+Canyon+stake+Toyota+Tsusho+million/6492821/story.html#ixzz1vhJGesC2
An easy mutual win for the parties is to agree to capture and sell gas that is being flared at existing wells (oil wells in particular). If the parties provided trucks, compressors and tanks at well sites, they could sell the gas at a low profit margin, but gain environmental benefits (including carbon tax improvements) and improve their environmental image. A reasonable investment by each side per well would have tangible and intangible payoffs.
There are many other possible ways to jointly create new value – the students must look for opportunities in the details of their businesses.
Kitimat and Canada oil and gas information
Numerous articles about the Kitimat projects can be found at:
-
http://www.theglobeandmail.com
-
http://www.calgaryherald.com
-
http://resourceinvestingnews.com
-
http://www.reuters.com
-
http://www.bloomberg.com
-
http://www.albertaoilmagazine.com
-
http://www.bcogc.ca
-
as well as the websites of companies and government agencies active in the region.
Commodity price information can be found at:
-
http://www.bloomberg.com
-
http://www.cnn.com
Pipeline maps can be found at:
-
http://www.eia.gov
-
http://www.encana.com
-
http://www.nrcan.gc.ca
|
Confidential information for Toyota Tsusho
You prefer dry gas plays over wet gas plays. Your reason is that you do not want to invest in equipment to process wet gas, even if you can gain profits selling the condensates. You prefer to have a simple business process in which you buy gas at low cost and ship it by trucks or pipeline to a Pacific port to be compressed and loaded onto ships for transportation to Japan. This is a high margin, low investment and simple business. You avoid a large amount of regulation, a more complex web of stakeholders and the need for greater investment in staff and equipment if you remain with dry gas only. Perhaps in some years you will have enough experience to consider wet gas plays in Canada.
Your management team has decided that you can use an additional $300 million to $350 million for dry gas plays in North America, and even up to $450 million if the value is very good. In any case, you will have to explain to the top management how your negotiations brought the best possible advantages to the company.
The Toyota Tsusho management team understands that almost no shipments, certainly not large volumes, can be made from Canada to Japan until liquefaction facilities are completed between 2016 and 2020 in Kitimat. Until then, Toyota Tsusho needs to gain long-term share of supply, without losing money.
Dry gas seems clean and simple to you at Toyota Tsusho. You are not very interested in wet gas with condensates, or Canada’s “dirty” oil sands. Any source of low cost gas is suitable to you. Infrastructure projects are possible areas of investment.
Your current BATNA in general terms is not to expand on the existing agreement and instead develop relationships in the U.S. or with other Canadian companies such as Imperial or smaller companies.
Your task: Explore all issues, improve your BATNA, agree to additional investment if suitable and search for ways to create value.
Issues to consider (please expand the list as needed):
-
Lifespan investment
-
Wet or dry gas
-
Participation in and availability of pipeline/infrastructure projects
Control of substantial amounts of gas, developed or not – however, you do not want more than a 49% share in any given field, business or operation in Canada
-
Rights to suitable “plays” in Canada that Encana controls
-
Price based on volume and substance (CBM, condensates, oil, etc.)
-
Activities of your competitors in Japan and other countries in East Asia
|
Confidential information for Encana
Encana’s strategy since 2011 has been to move into oil production, especially shale oil and shale gas, in Canada and the U.S. That means leaving behind dry gas, power generation and perhaps other activities. With the price of natural gas low, the existing Horseshoe Canyon Coalbed Methane play is safe and predictable, however low margin.
The 2014 spinoff and IPO of Prairie Sky Royalty allows Encana to easily sell more of the Horseshoe play in large or small percentages. After the IPO, Encana still owns 60% of the company. Toyota Tsusho could buy as much as they want, taking earnings in cash or gas. This stock clearly has a good future – it opened in Toronto at about $24 per share in June 2014 and quickly went to about $40 (TSX: PSK). With such a good price, you have a lot of flexibility in offering the Horseshoe play to Toyota at a high price, or even at a 10–14% discount if they bought half or more of your remaining shares of Prairie Sky or provided other value for Encana. A sale of Prairie Sky shares would likely be the easiest transaction for all parties.
To generate serious profits for Encana, you need to avoid investment in CBM or attract investment from other companies. Stronger profit opportunities are coming from gas with condensates, usually in deep shale rock requiring high investment per well. The interest (and deals) from Toyota Tsusho and Mitsubishi have been very welcome, especially after the difficulty interacting with Chinese companies in Canada in recent years.
Of course, you are not limited to inviting investment in CBM plays. You are very interested in partnerships to build pipelines, compression plants, new oil and gas development, anything really. Further, you can sell assets and business units such as power generation plants.
You of course would like Toyota Tsusho to buy gas that is being flared at sites other than the Horseshoe play. It would increase your environmental credibility and make some money that is otherwise (literally) being burned. Gas is flared currently as a convenience, for safety and to decrease release of greenhouse gases.
In any case, you will have to explain to the top management how your negotiations brought the best possible advantages to the company.
Your general BATNA is to develop agreements with other companies in Japan (Mitsubishi, Idemitsu) or other countries (Petronas, Korea Gas).
Prairie Sky Royalty holds the royalty rights to five million acres of the CBM Horseshoe/Clearwater play. This company is owned by Encana. Prairie conducted an IPO in June 2014, selling 52 million shares (40% of the company) on the market. Encana holds the remaining 78 million shares. Encana can sell as many of these shares as they wish to any party.
Your task: Explore all issues, improve your BATNA, agree to additional investment if suitable, and search for ways to create value.
Issues to consider (please expand the list as needed):
-
Lifespan of a field and investment lifespan
-
Dry gas compared to wet gas/condensate projects
-
Pipeline/infrastructure projects
-
Percent share in and control of a play with Prairie Sky Royalty or any infrastructure
-
Capturing and transporting gas that currently is being flared
|
Share with your friends: |
