Canadian oil patch future about ‘scale and size’ M&A activity
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There’s a catchphrase - “scale and size” - that’s spreading like a virus through the Canadian oil patch these days.
What it means in real terms was captured in a few days around the middle of February with a succession of deals and plans for strategic shifts, prompting what many analysts believe will be a wave of further mergers and acquisitions, especially in the Montney shale play of northeastern British Columbia and northwestern Alberta.
On the same day, Brookfield Infrastructure Partners launched a hostile C$13.5 billion takeover attempt for a coveted midstream company, Inter Pipeline, followed in a few hours by a friendly move to combine the forces of ASRC Resources and Seven Generations Energy.
Adding to the mix, Montreal-based engineering firm SNC-Lavalin Group announced it was quitting the oil and gas sector by selling its industry unit to Kentech Corporate Holdings of the United Arab Emirates.
No firm price was disclosed, but SNC said it expected to pocket a small gain after taking a writedown of up to C$295 million on the value of the asset.
The sale to Kentech marked a full retreat from oil and gas for SNC-Lavalin just seven years after it made a C$2.1 billion bet on the industry by acquiring Kentz Corp.
SNC helps oil and gas producers in the Middle East and elsewhere set up and maintain their facilities, but that business has floundered over the last year of COVID-19 turmoil, forcing the company to take a C$1.24 billion writedown.
Inter PipelineBrookfield, which is already the largest single shareholder in Inter Pipeline at 20%, is widely expected to overcome resistance to its offer.
It said talks with Inter Pipeline were “positive in spirit,” but the targeted company said that it has an “intrinsic value far in excess of our assessment, largely driven by a more optimistic outlook for future growth and a recovery of commodity prices in excess of current market expectation.”
The takeover proposal is worth C$16.50 a share, making the 80% of Inter Pipeline that Brookfield does not already own worth C$5.7 billion.
Inter Pipeline said it received unsolicited, conditional proposals last year from Brookfield in the range of C$17-$18.25 per share.
Brookfield is willing to pay a maximum consideration of about C$4.9 billion. The remainder will be in shares.
Calgary-based Inter Pipeline, with about 625 employees, is constructing a C$4 billion petrochemical plant near Edmonton that is scheduled for completion within a year. Its holdings already include 2,050 miles of oil sands transportation, 240,000 barrels per day of natural gas liquids processing, 2,400 miles of conventional crude pipelines, 1.3 million barrels of bulk liquid storage and eight petroleum terminals in Denmark and Sweden.
ARC, Seven GenerationsIf completed, the ARC-Seven Generations transaction will create Canada’s sixth largest energy company, producing 340,000 barrels of oil equivalent per day, representing the country’s largest condensate producer and third largest natural gas producer.
The companies said in a joint statement that the merger will have “material size and scale that enhances ARC’s and Seven Generations’ existing commodity and geographic diversification.”
ARC Chief Executive Officer Terry Anderson said the new entity will focus on reducing Seven Generations net debt of C$2.1 billion.
Only when that short term objective has been achieved will the company look at further developing its assets, he said.
“We don’t need more acreage (ruling out any thoughts of further acquisitions). We’re going to be able to develop internally and grow our production base in the future, but inventory isn’t our concern,” Anderson told analysts and investors.
Montney acresThe combined company, operating under the name of ARC Resources, will be able to use its financial strength to develop its 1.1 million net acres in the Montney region, rated as North America’s fourth largest shale play, aiming for output of 1.4 million boe per day later this year.
The resources controlled by the new entity will rank only behind the Permian and Marcellus basins in the United States. But bringing Montney’s potential into full production will require expanded pipeline capacity and increased spending on drilling, said Jeremy McCrea, a Raymond James analyst.
Montney deals last year included ConocoPhillips purchase of land from Kelt Exploration and Canadian Natural purchase of Painted Pony Energy.
If U.S. gas development declines under President Joe Biden, Montney’s fortunes could surge, said Stephen Kallir, vice president of Calgary-based BlueSky Equities, who is counting on another “headline grabber” in the region this year.
Eric Nuttall, a senior portfolio manager with Ninepoint Partners, believes the growing size of ARC and Tourmaline Oil (which bought Modern Resources and Jupiter Resources last year), will provide greater impetus for smaller producers to consider mergers and acquisitions, or risk getting left by the wayside.
“With each successive transaction, the pressure on remaining laggards to do something different, to try to gain greater relevancy … only gets stronger,” adding weight to the pursuit of “scale and size,” he said.
- GARY PARK