Hunt for oilpatch bargains heats up

M&A gusher expected amid energy rebound

• After a slow couple of years, merger and acquisition activity in the Canadian energy sector is expected to rebound in 2017 as oil prices stabilize, strong domestic companies hunt f or bargains, and i nternational and struggling players keep unloading non-core assets.

Adam Waterous, who is leaving his job as global head of investment banking at Scotiabank to start his own private equity company, predicted a very busy year as “legacy” companies continue to restructure and cut costs.

“One of the most effective ways to do it is through a combination to provide better scale,” he said. “So (we) could see big mergers.”

Dirk Lever, head of research at Alta Corp. Capital Inc., expects companies to sharpen their focus on core assets and take advantage of the oil price rebound to sell those that aren’t as vital.

“I think we are going to see a cleaning up of balance sheets and a refocusing on businesses, where guys are going to say, ‘ That is our key play, that is where we are focused’,” he said.

But the mood remains cautious, he said.

Acquisitions can play nicely if the oil price recovery holds and the OPEC cartel delivers on its production cuts, Lever said. “But if it falls apart, that will scare a lot of people,” he said.

Christopher Sheehan, director of transaction research at IHS Markit, the global energy research firm, sees a recovery in both deal activity and deal value in both the United States and Canada, “but we are coming off 10-year lows, so it’s kind of a bounce off the bottom.”

According to IHS, deals worth almost $ 16 billion were locked up in Canada in 2016, an increase from only $6.6 billion in 2015.

There were 51 transactions, both sale of assets and corporate mergers, up from 43 in 2015. The biggest was Suncor Energy Inc.’s acquisition of Canadian Oil Sands Ltd., worth $ 6.2 billion.

It’s still a long way from the big M&A days before the oil crash, when international oil and gas companies were flocking to Canada to get a piece of its oilsands. Deal value peaked in 2012, when the Canadian oilpatch locked up 100 deals worth collectively more than $ 51 billion, according to IHS.

“I think there will be an improved environment for asset transaction” in 2017, Sheehan said. “There are still a number of companies that are looking to improve their balance sheets and to divest assets. Corporate deal activity can be more sporadic … we won’t see that unless oil prices recover to the type of levels we had prior to the crash, mid-2014.”

Last week, Calgary- based Alta Gas Ltd. confirmed it is in talks with a third party about a potential transaction, with the speculation centred on a merger with WGL Holdings Inc.

Smaller and mid- c ap companies, especially those active in the Montney and other light oil plays, will lead consolidation, he predicted.

Indeed, Sheehan expects deal activity to be concentrated outside the oilsands business, which remains constrained by concerns about the stability of oil prices and growing regulatory restrictions.

Analysts at BMO Capi t al Markets expect national oil companies such

STILL A NUMBER OF COMPANIES (LOOKING TO) IMPROVE.

as Abu Dhabi- based TAQA and Korea- owned Harvest Operations Corp., and international companies includi ng U. S.- based Apache Corp. and Conoco Phillips, to be active sellers as they re-allocate capital away from their Canadian portfolios.

Conoco Phillips alone may be prepared to sell conventional assets producing up to 50,000 barrels of oil equivalent a day in the first half of the year, analysts Ray Kwan, Joe Levesque, and Randy Ollenberger said in a report to clients.

The buyers will be producers with a strong market following, access to capital and targeting “bolt on” acquisitions. Canadian Natural Resources Ltd., Raging River Exploration Inc., Prairie Sky Royalty Ltd., Freehold Royalties Ltd., Paramount Resources Ltd., Spartan Energy Corp., Whitecap Resources Inc., Tourmaline Oil Corp. and TORC Oil & Gas Ltd., “could be, or will continue to be, active from an M& A perspective,” the analysts predicted.

Activity in 2017 will be focused on accretive acquisitions to boost core areas, in contrast to last year, when strong producers were able to scoop up prime assets put on the block by weak competitors to survive the downturn.