Oilpatch M&As off to hottest start in years, fuelled by low prices

Suncor Energy Inc.’s closure of their $6.6 billion Canadian Oil Sands Ltd. purchase Monday and TransCanada Corp.’s US$13.3 billion proposed acquisition of Columbia Pipeline Group indicate a recovery in M&A deals, using the segment enjoying its best year-to-date performance since 2009, according to data.

“You possess a little more upward momentum in oil prices and the fire is burning a bit brighter,” said Chip Johnston, an M&A lawyer with Calgary-based Stikeman Elliott LLP.

Sixteen Canadian oil and gas proposed deals valued at approximately $19 billion year-to-date dwarf the $2.4 billion in 27 deals during the same period last year. The 2016 figure, while boosted through the TransCanada deal, doesn’t include Imperial Oil Ltd.’s recent $2.8 billion divestment of gas stations.

Frank Turner, a partner at Calgary-based Osler, Hoskin & Harcourt LLP said there’s optimism for more deals this season as many in the industry see oil languishing at affordable prices for extended.

“You didn’t visit a lot of M&A in 2015, but 2016 might be different,”  Turner said. “Some companies’ strategy was to hang in and ride it out, however for some there won’t be enough runway to pursue that strategy. They have to do something else.”

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While U.S. crude oil prices have shot up a lot more than 50 per cent since their lowest reason for January – they crossed US$40.06 per barrel Monday – many Canadian companies are not convinced they can keep your lights on.

Junior oil and gas producer Terra Energy Corp. said on Monday its directors and officers have resigned and it’s ceasing operations after its lender, Canadian Western Bank, demanded full repayment of their debt.

TSX-listed Bankers Petroleum Ltd. also agreed to sell its Albania-focused assets to China’s Geo-Jade Petroleum Corp. for $575 million Monday.

Meanwhile, Penn West Petroleum Ltd. who has sold some of its assets for $230 million, included in a divestment technique to lessen the burden on its challenged balance sheet.

But analysts are worried that many in the market remain asset-heavy and cash-poor.

“We see pointless to purchase this name and therefore reiterate our underperform rating and $0.50 target price,” said Kyle Preston, analyst at National Bank Financial, noting that the sale of Penn West’s high netback assets worsens the company’s debt-to-cash flow ratios.

Johnston thinks M&A markets may have found their sweet spot as oil costs are rising but remain low for the near future, leaving many companies distressed.

“That’s a benefit for businesses with healthier balance sheets that see transactional activity, when compared with managements conceding that they can’t proceed with what they have.”

Rising equity offerings will also be adding to the keenness and underscoring investors’ willingness to fund expansions and acquisitions. Canadian gas and oil companies raised $3.17 billion in 10 transactions in the first two months of the year, it is best start since 2012, and 40 per cent greater than the same period this past year.



And there’s an abundance of funds if the right deal arrives. Canada’s five major oil and gas companies are also sitting on an US$8.5 billion pile of money, based on Bloomberg data, but most are keeping their powder dry to hold back the severest price downturn in a generation.

“The speculation was these companies would reinvest in the sector, and use it as a war chest for investments and acquisition,” said Turner. “I don’t know, I think some of those information mill seeing that as a hedge against a sustained downturn in the commodity price.”

Imperial Oil sold nearly 500 of their gasoline stations for $2.8 billion this month, but snuffed out speculation of a purchase by seeking a permit to build an in-situ Cold Lake project.

The announcement “could throw some cold water” on market theories regarding any potential oilsands acquisitions that Imperial may pursue because the application represents another organic growth avenue, said Greg Pardy, analyst at RBC Capital Markets.

Private equity and pension funds may be more likely drivers of M&A activity, said Stephen Griggs, ceo of activist investor Smoothwater Capital Corp.

“You will notice a lot of private equity investors headed up by smart people out patrolling for distressed companies that are fundamentally very valuable – they just have the wrong capital structure.”

Toronto-based Smoothwater disagrees using the board around the future strategy of Alberta Oil Sands Inc., a business that finds itself in the unique position of getting hardly any debt and $35 million in cash as compensation through the Alberta government for cancelling its leases.

Smoothwater, which announced it had raised its equity to 10 per cent within the junior company, believes Alberta Oil should return cash to shareholders and effectively “wind the company up”, instead of make use of the funds for any transaction.

“There are several other companies that appear to be interesting,” said Griggs, although another transaction is not imminent.

While peer-to-peer deals between major companies may be sporadic, opportunistic activists and long-term investors for example pension funds, private equity finance and even Asian investors may start to kick tires of Canadian assets, drawn by the lower loonie.

“Chinese outbound investment has been obtaining having seen dropping very significantly. I think Canada many start to see some of that as well,” says Turner, who advises Osler’s Asian clients.

Financial Post

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