|
Testing the M&A market Mid-size, junior Canadian producers ready to pounce in distressed market as weakened balance sheets force some companies to let go Gary Park For Petroleum News
Buyers and sellers are starting to jam up Canada’s oil and natural gas marketplace ahead of what is expected to be a period of feverish activity in the buying and selling of distressed assets.
In their latest quarterly reports, mid to small producers Crescent Point Energy, Kelt Exploration and Raging River Exploration said they are equipped to grow through acquisitions as extended low oil prices drag down property values.
Crescent Point - which entered 2015 with production nudging 155,000 barrels of oil equivalent per day, including a heavy emphasis on the Canadian and North Dakota Bakken - is brimming with confidence that it can continue a string of acquisitions made last year.
“We believe the steps we are taking now, in terms of lowering our cost structure and improving our efficiencies, will benefit the company in all price environments,” Chief Executive Officer Scott Saxberg told analysts.
He said the achievements in the Torquay zone of Saskatchewan’s Flat Lake play demonstrate “the strength of our business strategy of acquiring, developing and exploiting large oil-in-place pools with low recovery factors.”
In addition Saxberg said advances in waterflood-related technology have the potential to generate significant value for shareholders, with “increased recovery factors and capital savings when applied across out large drilling inventory.”
That could also underpin any moves the company might take to negotiate bolt-on acquisitions in its core areas if the anticipated oil patch fire sale starts to spread across North America.
Crescent Point has been labeled by Kyle Preston, an analyst with National Bank Financial, as occupying the “driver’s seat” among possible suitors for assets or takeovers, especially in the Bakken region where Lightstream Resources is among those on the lookout for bids.
Saxberg said discussions have taken place with different partners, but noted that Crescent Point will “very selective” in looking at opportunities or distressed companies.
Kelt sees opportunities Kelt said in a statement that “market instability and volatile commodity prices” have forced many companies to reduce their 2015 capital spending plans.
“Kelt believes that the current business environment creates opportunities to add value at a reasonable cost and is optimistic about the long-term outlook for oil and gas commodity prices,” it said.
“The company is opportunity driven and is confident that it can grow its production base by building on its current inventory of development projects and by adding new exploration prospects.”
Kelt reported production of 15,600 boe per day in the final quarter of 2014, almost triple its output a year earlier, and is paying C$302 million to take over Artek Exploration and add 14 million cubic feet equivalent per day (39 percent liquids), plus almost 48,000 net acres in the Doig and Montney plays, consolidating its position in northeastern British Columbia.
The deal will see Kelt issue 26.9 million shares valued at C$218 million, a 61 per cent premium over the five-day, volume-weighted share price of Artek.
Raging River Raging River has been active in buying property and selling shares, ending 2014 with two transactions totaling C$123.6 million, adding in a news release that it “continues to focus on excellence in execution of its base business while diligently pursuing accretive acquisitions.”
Brian Kristjansen, an analyst with Dundee Capital Markets who covers junior and intermediate producers, said he expects the M&A sector to gather momentum later in spring as weakened balance sheets force companies to sell assets.
“All the clean balance sheet companies are going to be in a very strong position to acquire assets from more troubled companies,” he said, suggesting the shake-out is likely to occur in May when bank lines get revised.
Raging River, typical of its peer group, reported drilling 60 wells so far this year, but only one-third were completed. It said the rest will wait until May when it expects to take advantage of “reduced service costs” among its contractors.
Kelt Chief Executive Officer David Wilson has indicated his company could defer about half of its planned C$90 million capital budget for 2015 in favor of acquisitions.
Montney vital for LNG One of the few plays where E&P companies can make a profit is the Montney shale gas formation in northern British Columbia and Alberta, even with gas selling as low as C$2.65 per thousand cubic feet.
But Patrick Ward, chief executive officer of Painted Pony Petroleum, said his company can still make money by drilling and completing a horizontal well in the Montney for C$6.7 million.
He told investors at a FirstEnergy Capital conference in New York earlier in March that the wells in the formation are prolific at low day-to-day operating costs, putting them on a similar footing with the Marcellus in New York and Pennsylvania.
With an estimated 271 trillion cubic feet of marketable gas on the British Columbia side, the Montney is seen as vital to the success of any LNG projects that proceed in the province, notably the Pacific NorthWest venture led by Malaysia’s Petronas which has a major stake in the play.
Painted Pony and ARC Resources share the view that should LNG exports be realized that would lift the Montney - what Ward describes as “the peanut butter on the cookie.”
Myron Stadnyk, ARC’s chief executive officer, said his company is building its strategy around an assumption that gas prices will remain close to C$3 and the new hydraulic fracturing technology it is employing to increase the long-term flow rates of wells.
Investors have endorsed that confidence by completing a C$402 million financing by ARC in January and delivering a bought deal of C$55 million for Painted Pony last fall.
Surprise element possible A surprise element could also enter the M&A equation, said John Chambers, chief executive officer of FirstEnergy, who said a number of oil majors who missed out on the first wave of the North American shale frenzy, might be attracted by bargain-basement assets, or even corporate takeovers.
He said “some very large companies feel they are under-represented in the shale plays in North America.”
“In shale gas, you will see consolidation and you may see some interest from the majors some of whom are not positioned in the Canadian shale plays who may come in and make some bigger acquisitions,” he told the Financial Post.
Chambers is counting on two waves of M&As over the next two years - initially focused on companies with high leverage and operating costs looking for solutions as their cash flows shrink, then turning to companies that have survived the current downturn, but are having difficulty presenting growth plans.
| 