The pace of mergers and acquisitions in Canada’s oil and gas upstream has been so strong that it accounted for about 20 percent of global activity, but there is no clear sense of what underlies the trend.
For the second quarter, the comeback totaled 56 transactions valued at C$8.1 billion, a slight tapering off from the first quarter when 62 deals and C$9.6 billion of business was completed, skewed largely by Canadian Natural Resources C$3.1 billion acquisition of Devon Energy’s conventional Canadian holdings.
The second quarter also edged above the average for the period of C$8 billion in the 2007-13 period.
The consulting firm of Deloitte offered a slightly different count, estimating 54 deals, compared with 44 a year earlier.
The conclusion by observers such as PLS Inc. “confirm the surge in deal value seen during Q1 was not a fluke, but rather the outgrowth of a structurally improved market environment following a multi-year low in activity in 2013.”
The firm suggested the “key drivers have been a resurgent financial market, the ascendance of domestic dividend-plus-growth companies, consolidation among juniors and a well-supplied pipeline of high-quality, cash-generating deals for sale.”
Further spurring the outlook has been early signs of a return by overseas buyers, who responded to the Canadian government’s tightening of ownership rules in the oil sands sector by turning their attention to light oil and natural gas.
The second-quarter spending breakdown, according to PLS, has been 64 percent on producing properties and 32 percent on corporate buys, with undeveloped acreage taking a sharp drop in the latest quarter from the January-March period when a trio of Asian companies (Sinopec, Indian Oil Corp. and China Huadin) invested C$2.5 billion on Montney rights held by LNG operator Petronas.
Gas prospects draw interestInterest in accumulating gas prospects ahead of possible LNG projects has gained momentum, especially in the Montney shale that sits astride the northern British Columbia-Alberta border.
Montney, which is closest to the LNG terminal sites and holds an estimated 145 years of current Canadian gas consumption, has been driving up the value of producing companies such as Painted Pony (which is rated as a potential takeover target), Crew Energy and Birchcliff Energy.
Jeremy McCrea, an analyst with AltaCorp Capital, told Bloomberg that the producers “are trying to clean themselves up to be the most attractive to potential LNG players,” such as Petronas, the United Kingdom-based BG Group, Royal Dutch Shell and Woodside Petroleum, with BG and Woodside under pressure to line up Canadian gas assets.
He said other candidates at a greater distance from the British Columbia coast include NuVista Energy, Advantage Oil & Gas and Kelt Exploration.
Painted Pony sharpened its focus in July by selling Saskatchewan oil properties to become a “pure-play” Montney producer; Cequence Energy made a similar move by selling gas properties in Alberta; and Crew is seeking a buyer for its oil property in southeast Alberta to earmark most of its capital spending for the Montney.
Painted Pony Chief Executive Officer Patrick Ward has indicated that he has met in recent years with a number of LNG players, but cautioned that final investment decisions on any of the projects are not imminent.
In recent weeks, Painted Pony logged a 64 percent rise on the Toronto Stock Exchange, Crew was up 54 percent and Birchcliff gained 51 percent.
McCrea said all are encouraged by a 15 percent increase in North American gas prices this year.
No US buyersPLS reported that seven of the 10 largest second-quarter deals involved Canadian-based buyers, but none, in keeping with recent trends, were U.S.-based companies.
Shailender Randhawa, an analyst with RBC Dominion Securities, said the real gains have involved mid-size companies with market caps of C$100 million to C$500 million.
RBC said that sector has tallied 30 deals so far this year, up 50 percent from the same period of 2013 and strongly ahead of the 2012 tally of 23 deals.
In addition to the Montney and southeast Saskatchewan, interest among buyers is concentrated on the Cardium and Viking resource plays in Alberta.
Dividend-paying companies have accounted for C$2.5 billion of the M&A deals this year and are expected to continue taking a key role.
“Based on experience from the trust era, we’d expect 20-25 percent of (their) annual production to be replaced via acquisitions to manage declines from new drilling and to extend their tax horizons,’ Randhawa wrote.
“Given the relative scarcity of assets in the marketplace, we’d expect consolidators to increase their efforts on (private companies), public names with stretched balance sheets and under-appreciated assets in larger companies,” he said.
Randhawa calculated that the second-quarter average price for oil-weighted assets was C$85,900 per barrel of oil equivalent per day and C$111,000 per producing barrel of reserves.
Using its own valuation analytics, PLS said Canada reached mid-year with US$19 billion of assets on the block compared with US$23 billion at mid-2013, suggesting the latest estimate represents about seven months of deal inventory.
It compared that with US$41 billion in the United States, or five months of deal inventory, and US$125 billion globally (seven months of inventory).