Oil patch merger-and-acquisition activity slumped in 2015 as the skid in crude prices made finding common ground on value a tall order.Ben Nelms/Bloomberg
Dozens of oil and gas companies have put assets on the auction block to try to raise cash as crude prices remain in a trough. The big unknown is whether buyers will show up.
Oil patch merger-and-acquisition activity slumped in 2015 as the skid in crude prices made finding common ground on value a tall order. Now, would-be acquirers need to be confident that assets won't lose their worth after doing deals.
That's difficult following a year in which companies large and small chopped capital spending and laid off staff to deal with a persistent downturn. Few are willing to take on the risks of bulking up without knowing when crude will rebound.
"There's no doubt there's a lot of private capital that's been mobilized to take advantage of this, and I think it will get deployed," said Michael Freeborn, head of energy investment banking at Canadian Imperial Bank of Commerce. "But most companies are focused on screwing down the capital and living within their own means. The boardroom confidence quotient is, as you would expect, reasonably low."
The fall in U.S. oil prices from about $100 (U.S.) a barrel in mid-2014 to below $30 in early 2016 has created massive dislocation in the Canadian energy sector, as companies have been forced in many cases into survival mode.
There had been widespread expectation among deal makers that growing financial distress in the sector could force a wave of debt-heavy companies, pushed by lenders, to seek buyers, but that type of business has been sporadic.
"We certainly had a lot of people who were motivated to sell, perhaps not their company, but a portion of their assets to help them deleverage," said Trevor Gardner, co-head of energy investment banking in Canada for RBC Dominion Securities.
"I think that was a prudent and appropriate course of action. The challenge they were faced with was the way that the market was declining so significantly on the commodity price side, and aligning buy and sell views in the process."
It certainly played out in the numbers. In 2015, there were $15-billion worth of oil and gas acquisitions, including assumed debt. Of the total, $6-billion represented takeovers of companies, and properties accounted for the remainder, according to Sayer Energy Advisors. The year before, the industry notched $49-billion worth of deals, with $24.2-billion being corporate takeovers and the rest individual assets.
"There's a 'no one moves, no one gets hurt' type of mentality," said Shane Fildes, managing director and head of global energy for BMO Nesbitt Burns. "For the ones that you would call the winners, or strong, it really didn't pay to be contrarian and look for value and do deals."
Larger deals included Cenovus Energy Inc.'s $3.3-billion sale of royalty and fee lands to the Ontario Teachers' Pension Plan Board and Canadian Natural Resources Ltd.'s divestiture of similar assets to PrairieSky Royalty Ltd. for $1.8-billion.
Late in the year, Suncor Energy Inc. launched its hostile bid for Syncrude Canada Ltd. partner Canadian Oil Sands Ltd., and in January, the two sides agreed to a $4.2-billion friendly transaction. That's seen as a unique fit for Suncor, given its intimate knowledge of the Syncrude operation.
"It takes a very brave buyer to wade into these kinds of markets and decide that now is the time to be opportunistic. With 20-20 hindsight, people tend to look back and say, 'Boy, I wish I'd bought some assets back then,'" said Peter Buzzi, RBC's head of M&A investment banking. "But when your own share price is down, your cash flows are down and you're laying off a lot of people, it's tough as a CEO to go to your board and say that it's time to spend $5-billion on a big acquisition."
Even if oil prices fail to return to pre-crash levels, some stability in the markets, with OPEC beginning to study whether production quotas need to be reduced, could bring about more mergers and acquisitions.
"I personally expect more activity," Mr. Freeborn said. "It's probably going to be less distress and things being forced on companies. Rather, people looking at the environment and saying they'd be much more comfortable running with a balance sheet that had the benefit of putting cash against debt, even if that means selling a good asset."
Jeffrey Jones