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Cheaper to buy than drill
One blockbuster deal, carrying a market value estimated at C$46 billion, turned the 2009 outlook for mergers and acquisitions in the Canadian oil patch on its head.
Until March 23, the operative word in Canada’s M&A and financings scene was “down,” as deal-making slumped to its lowest level in five years.
The North American market went into a tailspin about mid-2008, resulting in a precipitous drop in Canadian M&As to a mere US$14.5 billion from a record US$45.5 billion in 2007, with the number of transactions falling 40 percent to a five-year low, according to a global upstream review by IHS Herold and Harrison Lovegrove.
The report showed 55 deals valued at more than US$10 million were posted in the first eight months of 2008, followed by only 10 in the final four months.
Major round possible More of the same was being forecast until Suncor Energy and Petro-Canada pulled their surprise out of the hat.
Now analysts and industry insiders are ready for what could be a major round of consolidation.
“These generally are not one-hit wonders,” Andrew Martyn, vice president at Davis-Rea told the Globe and Mail.
The underlying reason stems from the cratering of commodity prices that dragged down share prices and took a large bite out of reserve values.
Ben Dell of Sanford C. Bernstein in New York said in a report that the gap between the cost of buying assets and drilling for them is greater than ever.
He said that buying an average company, including its undeveloped reserves, now costs about US$11 per barrel — about half what it cost to explore for and develop new reserves in 2008.
“It appears the energy space is on the cusp of an M&A boom,” Dell wrote, suggesting that ExxonMobil, with about US$30 billion of available cash, and other majors will be on the prowl for smaller companies to fill gaps in their exploration portfolios and ensure they have enough land to search for discoveries.
“If this isn’t the time for ExxonMobil (which owns 69.6 percent of Imperial Oil, Canada’s largest integrated oil company) to undertake a corporate M&A spree, then investors could be forgiven for asking what the company is exactly waiting for,” he said.
M&A: Up or down? “Consolidation makes an incredible amount of sense,” said Bill Bonner, president of Brickburn Asset Management.
Canadian companies on the shopping list include the usual suspects — Nexen and Talisman Energy — both of which have attractive, but widely scattered holdings.
The Herald/Harrison Lovegrove survey showed Canadian deals accounted for less than 15 percent of the global M&A value last year, down from 30 percent in 2007 and the lowest point since 2005, with only two exceeding US$1 billion — Royal Dutch Shell’s takeover of Duvernay Oil for US$5.8 billion and a US$1.3 billion all-share merger of ProEx Energy and Progress Energy Trust.
The value of oil sands-related activity plunged to US$2 billion in 2008 from US$18 billion the previous year, the report said.
On a global scale, the weighted-average proved-implied-reserve value rose to US$11.51 per barrel of oil equivalent from US$10.01 in 2007, while the worldwide transaction value for the upstream slumped to US$104 billion from US$160 billion.
Calgary-based Sayer Energy Advisors forecasts M&A activity will remain in the doldrums this year, blaming Alberta’s new royalties, the dive in oil prices and the economic crisis, along with the deadline for changes to income tax treatment of Canadian royalty income trusts.
Sayer estimated the total enterprise value of Canadian deals was C$17.5 billion in 2008 compared with 2007’s C$50 billion.
The firm predicts that corporate transactions will prevail this year, continuing a trend when asset deals dropped to 20 percent of total transaction value in each of the past two years.
Not many companies for sale Sayer President Alan Tambosso says the trend is likely to extend far into 2009 given the impact on property valuations and corporate balance sheets of the credit crisis and low oil and gas prices.
He said not many public or private companies are known to be for sale or reviewing strategic alternatives to maximize shareholder value, although it is possible some are “quietly” probing alternatives in order to survive.
In a separate report, Sayer said financings declined last year to C$15.7 billion from a record C$25.5 billion in 2007, with debt financings taking the largest hit, falling 39 percent to C$8.2 billion from C$13.5 billion.
Equity financings declined 27 percent to C$7.2 billion, with issues sliding to 582 from 752, and royalty income trust unit financings dropping 86 percent to C$318 million, said Sayer analyst Ryan Ferguson Young.
He said only six initial public offerings were completed in 2008 compared with 18 in 2007, with the average size declining to C$11.7 million from C$19.2 million.
—Gary Park
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