Ottawa's move to stop foreign state-owned enterprises from investing in Canada's oil patch have pushed down shares in Canadian oil companies, knocking between 20 and 30 per cent from  their value since the rules came in, an analysis from the University of Calgary finds.

When it allowed the takeover of Calgary-based oil firm Nexen by Chinese state-owned company CNOOC in December 2012, the federal government outlined the rules that would govern such takeovers in future — including a mandatory review of any transactions worth more than $354 million.

"Going forward, the [industry] minister will find the acquisition of control of a Canadian oilsands business by a state-owned enterprise to be of net benefit, only in an exceptional circumstance," Prime Minister Stephen Harper said at the time.

Lack of funding

That had the effect of putting a chill on funding in the oil patch, as a large source of revenue to run expensive (but possibly lucrative) oilsands operations dried up.

The Canadian Association of Petroleum Producers says the industry spent $29 billion on operations this year. That figure is unlikely to decline as Canada's oil output is project to more than double in the next two decades.

Canada's oilsands are expected to require about $100 billion in investment over the next five years. So removing a source of funding for those projects could make them even more expensive and be a drag on shares.

Foreign investors poured some $28 billion into Canada in 2012, a figure that dried up dramatically following the new policy statement. Consider that in calendar 2013, only a single foreign deal to invest in Canada's oil patch was announced when Chinese state-owned Yanchang Petroleum International Limited completed the acquisition of Novus Energy for $320 million.

"The findings of this paper indicate the federal government’s policy change has resulted in the material destruction of shareholder wealth," the paper finds.

Stock prices depressed

The authors looked at a number of variables surrounding oil prices and stock prices of various companies before and after the announcement in early December 2012.

In the aftermath of that decision, the price of the North American oil benchmark, WTI, moved steadily higher. Ordinarily, one would expect shares in oil companies to perform similarly as a whole, but they didn't. Larger companies lagged the performance of WTI by a few percentage points, and smaller companies (known as "juniors") fared even worse. 

The gap got progressively worse into the summer of 2013. At one point in July, the paper calculates, shares in junior companies in Canada's oil patch were worth almost 80 per cent less than they should otherwise have been, if left to market forces.

Small oilsands companies rely on outside investment to grow their operations much more than their larger counterparts. Much of that financing comes from joint ventures in which a partner buys a ownership stake in a project and reaps a proportionate share of its returns.

"There's a significant cost and that cost is borne disproportionately by juniors," Eugene Beaulieu, director of the school's international economics program, said in an interview.

The study was co-authored by Matthew Saunders, a senior analyst with early-stage oilsands firm Laricina Energy.

Gap remains

That gap in share valuations narrowed again through late 2013 and into early 2014 but as it stands now, the paper calculates that shares in large oilsands companies are as much as 20 per cent lower than they should otherwise be. Junior companies are still as much as 30 per cent lower.

In theory, foreign takeover deals are still allowed under Ottawa's new rules, provided a foreign state-owned entity doesn't have control. Put in practice, that investment seems to be slowing down.

"Joint ventures and other kinds of investments that weren't targeted by the policy have been affected," said Beaulieu. "It wasn't intended by the policy, but it seems to be having that effect."

"Our results indicate that the change in policy has had a negative effect, as measured by the impact on stock prices, on the industry, particularly the junior oil sands companies," the authors wrote. "We believe this will have negative consequences for the future development of the oilsands."