By Alex Kimani
A vicious one-two-three punch that started with a gloomy long-term future outlook due to rampant fossil fuel divestments, climate change policies, and decarbonization as well as shorter-term—but severe—shocks from the COVID-19 crisis, has thrown Canada’s most important export industry into an existential crisis.
Meanwhile, the drumbeat of exits by foreign oil firms bailing on the unprofitable tar sands has added an extra layer of gloom for an industry responsible for a fifth of Canada’s exports.
It, therefore, comes as little surprise that Canada’s oil and gas producers are scrambling to merge as they hope to survive to see another oil boom.
A wave of consolidation has hit Canada’s Montney oil and gas region as smaller companies sell their assets to bigger oil firms. Straddling northeast British Columbia and northwest Alberta, the Montney is one of Canada’s leading shale oil epicenters, producing 1.5 million barrels of oil equivalent per day, including 45% of Western Canada’s gas supply.
Faced with a six-year oil downturn, smaller, debt-ridden oil and gas producers are giving up the wait for rebound and resorting to mergers in a bid to survive.
They have little recourse: Just like their shale counterparts further south, Canada’s oil industry has seen once-prolific credit lines dry up as the value of their reserves rapidly dwindle during the prolonged crisis. Eighteen Canadian companies tracked by Wood Mackenzie saw the amount of their reserve-based loans shrivel by some C$1.8 billion, or 22% in the year-to-date.
Consequently, the Montney region has recorded at least nine significant deals worth some C$2.3 billion ($1.75 billion) over the past 12 months.
Two of the largest deals were acquisition of acreage by U.S. major ConocoPhillips (NYSE:COP) from Kelt Exploration (TSE:KEL) for $325 million as well as Canadian Natural Resources Limited’s (NYSE:CNQ) purchase of Painted Pony Energy in a $461 million deal. It’s worth noting that CNQ assumed Painted Pony’s total debt of approximately $350 million upon the purchase.
Companies operating in Canada’s natural gas sector have not been faring much better amidst the historic price crash. One of the Montney’s earliest gas drillers, Advantage Oil and Gas (TSE:AAV), sold a stake in its Glacier gas plant in July for C$100 million ($75.7M) in a bid to raise cash for operations but says it remains open to a complete merger.
Unfortunately, companies such as AAV could struggle to find buyers, given that there are very few potential buyers with strong enough balance sheets and easy access to capital to make deals. U.S. shale companies—some of the top prospective buyers—have also been struggling with the same issue.
Private equity bargain hunting
Dozens of companies in the Canadian Oil Patch, such as Bow Energy Ltd. (CVE:ONG) and Cequence Energy Ltd (TSX:CQE), have filed for bankruptcy protection or opted to restructure. Others like Obsidian Energy Ltd. (OTCMKTS: OBELF), however, are going off the beaten path–putting themselves up for purchase by private equity (PE) firms.
PE firms like Waterous Energy Fund have turned into trophy hunters, buying up distressed assets at dirt-cheap valuations. A good case in point is last year’s purchase of Pengrowth Energy Corp. for $740-million by Waterous’ subsidiary Cona Resources, representing less than a fifth of its more than $4B valuation at the time of the deal.
Massive discounts have pretty much become par for the course in Canada’s M&A space: A total of 23 such deals have been consummated in the year-to-date for an underwhelming total of $1.65 billion compared to $15.47 billion deal value from 42 M&A deals completed during last year’s corresponding period.
Waterous is a master of the game, having amalgamated six small producers from different deals into a giant it has dubbed Strathcona Resources Ltd., easily one of North America’s largest private-equity owned drillers with a daily production clip exceeding 60,000 barrels.
According to Waterous CEO Adam Waterous, there has never been a greater need for consolidation in Canada’s energy sector, noting that small oil and gas companies have been locked out of debt and equity markets, effectively leaving them orphaned. Waterous says these orphaned businesses need to come together if they are to survive the onslaught, which he does not see ending any time soon.
That said, it is worth noting that bigger oil companies have been holding up pretty well, with the likes of Suncor Energy Inc. (NYSE:SU), Cenovus Energy Inc. (NYSE:CVE), Canadian Natural Resources Ltd. (NYSE:CNQ) and Husky Energy Inc. (TSE:HSE) having little trouble tapping debt markets.