Dealmaking in oil patch: reset, repair and restructure
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Yadullah Hussain | October 2, 2014 9:17 AM ET
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Jeff McIntosh for the National PostOil and gas deals just over $32-billion have been announced or completed year-to-date, compared to around $13-billion in 2013 during the same period last year
Frothy equity markets are leading to more mergers and acquisitions in the Canadian oil patch, but the slew of deals this year belies the sector’s fragile state.
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A multitude of assets on the block and a lack of financial injections from investors have set the stage for a resurgence of acquisition activity for mining this year, dealmakers say. Keep reading.
“Thematically we are in a rebuilding, recapitalization and reinvestment phase. If you look at the deals, over half of them are ‘It’s broken, so how do we fix it?’ rather than ‘Look, we have created tremendous value,’” said Chipman Johnston, a Calgary-based lawyer at Stikeman Elliott LLP.
Canada has seen a resurgence in oil and gas deals this year, after a very lackluster 2013. Deals just over $32-billion have been announced or completed year-to-date, compared to around $13-billion in 2013 during the same period, FP Infomart data shows.
“Some companies are pursuing strategies where they focus on a single or a very small number of geographic areas,” said Frank Turner, a Calgary-based lawyer at Osler, Hoskin & Harcourt LLP.
The small-is-profitable theme is playing out across Western Canada.
What’s yesterday’s dog could become tomorrow’s great property
Larger companies such as Encana Corp., Imperial Oil Ltd. and Suncor Energy Inc., divested non-core assets this year that were snapped up by new management teams set up precisely to extract value from tired or underdeveloped assets.
“What’s yesterday’s dog could become tomorrow’s great property with changing technology, horizontal drilling and well completion techniques,” said Greg Turnbull, lawyer at McCarthy Tetrault LLP in Calgary.
“We see a cycle of junior oil teams, the consolidators and dividend-paying energy companies coming through. They are looking for mature oil and gas assets with lower declines to help pay the dividend and fund the growth of those entities. This is the area where people can see significant rates of return.”
Related Upstart Osum makes mark in oil sands, snaps up Orion project for $325-million Paramount Resources floats $50-million takeover bid for MGM Energy Encana Corp to sell Bighorn gas assets to Apollo’s Jupiter Resources for US$1.8-billion
Imperial offloaded some of its oil and gas assets to dividend-paying Whitecap Resources Inc. for $855-million, Suncor Energy sold off its Wilson Creek assets in Alberta to small-cap Tamarack Valley Energy Ltd. for $168.5-million, and upstart Osum Oil Sands Corp. picked up Royal Dutch Shell PLC’s Orion oil sands assets for $325-million.
“The industry is also rebuilding itself. Older teams are being retired and new teams are being introduced,” Mr. Johnston said.
Paramount Resources Ltd. took over MGM Energy Inc. for $50-million after the latter’s failure to monetize its Northwest Territories shale oil play, underscoring the theme of a massive spring-cleaning across Western Canada.
Private equity has also been on the prowl, driving some of the bigger deals in the Canadian oil patch this year.
Jupiter Resources, a unit of New York-based Apollo Management LLC paid $1.91-billion for Encana’s natural gas assets in Alberta, while TGP Capital also relieved the Calgary company of its natural gas properties in Wyoming for $1.98-billion.
THE CANADIAN PRESS/Jeff McIntosh"Bighorn is a high quality asset that has not been receiving significant investment in 2014. Going forward, it should serve as an excellent foundational asset for Jupiter Resources," Doug Suttles, Encana president and CEO, said in a statement.
Osler’s Mr. Turner says the arrival of PE giant Kohlberg Kravis Roberts LLP in Calgary and other big U.S. private equity and hedge funds has provided some comfort to capital-hungry small caps, especially in the absence of other investors.
“When capital markets weren’t really very accepting of new issues by oil and gas issuers and international state-owned enterprises were unavailable, private equity turned out to be a very good option,” Mr. Turner said.
The Canadian M&A turnaround is even more remarkable when you consider that many U.S. companies are in retreat and Asian state-owned enterprises have kept a low profile.
Houston-based Apache Corp. is looking to divest $800-million worth of assets in Alberta and has pulled out of the Kitimat LNG project on the West Coast, while Oklahoma’s Devon has sold its Canadian conventional assets. Meanwhile, Encana purchased Texas-based Athlon Energy Inc. for $7.1-billion, days after selling its stake in PrairieSky Royalty Ltd., in a sign that the U.S.’s liquids-rich play seemed more attractive to the Calgary-based energy giant than the acres of play available at home.
We have an industry fighting for capital allocation
“The scale of the U.S. industry is very significant – it’s 8 to 9 times larger than ours and money can be applied in a concentrated way there that the Americans are familiar with,” Mr. Johnston said. “We have an industry fighting for capital allocation.”
China’s state-owned enterprise PetroChina Co. Ltd. finally agreed to honour its commitment to fund Athabasca Oil Corp.’s Dover oil sands for $1.184-billion after numerous delays, but Asian companies have kept their head down this year, partly due to changing dynamics back home.
China has a new regime in place, while a major crackdown on corruption in state-owned enterprises means big-ticket deals are off the table for some time.
“It’s a pause, not a halt,” says Mr. Turner. “In South Korea, again, there has been a pause due to a change in government and they are also taking a hard look at some of the North American investments they have made.”
Harvest Operations Corp., a unit of Korea National Oil Corp., sold Come By Chance refinery in Newfoundland and Labrador to SilverRange Financial Partners LLC of New York for an undisclosed sum in September.
The federal government restrictions around SOE’s majority-ownership of oil sands, of course, has seen a freeze in Asian interest, but there may be opportunities for the smaller, battered oil sands companies.
THE CANADIAN PRESS/Jeff McIntoshTalisman Energy CEO Hal Kvisle speaks to reporters following his address at the company's annual meeting in Calgary, Wednesday, May 1, 2013.
Investors are circling around Talisman Energy Inc. while others, such as Sunshine Oil Sands Ltd., Southern Pacific Resources Corp., and Connacher Oil & Gas Ltd. may find a knight to lift their battered share prices.
“I see some consolidation coming, which may be investor-led or debt-holder driven, to try to consolidate that space,” Mr. Turnbull said.
The Canadian liquefied natural gas industry, which exists largely on paper, may also see some consolidation once the provincial and federal rules around taxation are clear.
“Every one has positioned themselves to be the beautiful bride, and I am not sure how many suitors are out there,” Mr. Turnbull noted. “Some projects will die on the drawing board, but the better projects will proceed.”
The theme of renewal and rebuilding seems to dominate the M&A landscape, with companies looking to build value rather than cashing, or harvesting, existing value.
“Equity seems to be backing reorganization and restructuring,” Mr. Johnston said. “I think 2012 was a bit of a fall season, when premiums were paid for deals. This is not fall where we take all the peaches from the orchard – this is June.”
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