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Canada’s M&A market uncertain Pressure building on companies to meet debt payments, forcing ‘for sale’ signs; others holding back in hopes of price recovery GARY PARK For Petroleum News
The parade of assets for sale in the Canadian petroleum industry is growing in numbers, especially as companies scramble to meet the demand for debt payments, but the unknown is how many prospective buyers will show up.
Some prospective sellers feel a growing confidence that any purchases won’t lose their value after deals are closed, in contrast to 2015 when the merger-and-acquisition market faced a rapid decline in transactions as the nosedive in crude prices made it difficult to find a common price level.
According to Sayer Energy Advisors, there were C$15 billion worth of oil and gas acquisitions last year, of which C$6 billion represented takeovers, with properties accounting for the balance. The year before, the industry tallied C$49 billion in deals, divided almost equally between takeovers and individual assets.
That downturn reflects what Shane Fildes, head of global energy for BMO Nesbitt Burns, said reflects a “no one moves, no one gets hurt” mentality.
Peter Buzzi, RBC’s head of M&A investment banking, said “it takes a very brave buyer to wade into these kinds of markets and decide that now is the time to be opportunistic.”
Michael Freeborn, head of energy investment banking at the Canadian Imperial Bank of Commerce, told the Globe and Mail that a sizable amount of private capital “has been mobilized to take advantage of the changing situation and is likely to get deployed.”
“But most companies are focused on screwing down the capital and living within their own means. The boardroom confidence quotient is … reasonably low.”
Husky sells properties At the upper end of the scale, Husky Energy has struck a deal to sell oil-producing properties in southwest Saskatchewan to Whitecap Resources for C$595 million in cash, extending its string of sales involving non-core assets this year to bolster its balance sheet.
The Saskatchewan properties currently deliver 11,600 barrels of oil equivalent per day.
Husky is known mostly for its heavy oil operations in Western Canada covering production and refining, along with its offshore production in Asia and Canada`s East Coast.
Already this year it has unloaded a 65 percent interest in pipeline and storage assets for C$1.7 billion and a C$163 million sale of oil and gas royalty interests.
Encana sales possible Pursuing a similar balance sheet objective, Encana is reported by industry sources to be pondering the sale of shale holdings in Western Canada that could fetch about C$1 billion from the divestiture of Gordondale assets in the Montney Basin.
Chief Executive Officer Doug Suttles said earlier in May that Encana may explore other options later this year as part of its ongoing efforts to simplify a transition to higher-margin production and greater efficiencies.
“We continue to believe in a focused portfolio,” he told investors. “In the near term, any proceeds received from asset sales this year … will be used to create further financial flexibility and balance sheet strength,” he said.
The cost-cutting mission has achieved positive results in the Montney play, reducing average well costs to C$5 million, down 22 percent from last year`s average.
For others with less depth than Encana, the warnings of possible defaults loom large.
Lightstream Resources, once a frontrunner in Canada`s Bakken formation, has only 90 days to avoid default by late July after its borrowing limit was slashed by more than half to C$250 million.
Even so, the company currently has an unused C$371 million under its credit facility, comfortably above its reduced borrowing limit.
But the company said it may not be able to generate enough cash to meet a June 15 interest payment.
Connacher Oil and Gas has reached an arrangement to negotiate with debt holders after it skipped a deadline on April 30 for an interest payment tied to a US$153.8 million.
Defaults expected to peak Defaults in the industry are expected to start peaking even if oil holds its ground above US$40 a barrel as banks tighten lending restrictions and companies battle to cover their basic operating costs.
For the banks that showed leniency through 2015 in the hopes of commodity price improvements, patience has started to wear thin as the lenders apply their traditional yardstick of measuring debt levels against earnings for the previous four quarters.
Thomas Matthews, an analyst with AltaCorp Capital, said the banks are now wavering on how much more leeway they are prepared to extend.
But few companies are prepared to raise a surrender flag, opting instead to live in hopes that oil prices will recovery over time.
However, companies such as Lightstream and Twin Butte Energy, which is in talks to extend a deadline on an C$85 million debt payment, can no longer wait indefinitely as they grapple with the drain on shrinking cash flows.
TD Securities analyst Aaron Bilkoski said Twin Butte`s best hope is to extract concessions from lenders that will allow it to avoid fling for creditor protection until it can attract a takeover offer or commodity prices stage a comeback.
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