Q2 2013 Canadian Oil & Gas M&A Market Sags to Just C$2.1 Billion

Oil & gas M&A values considerably dried up in Canada during the second quarter of 2013. Although M&A spending eased up across the whole world, the CanOils M&A database shows the trend was more pronounced in Canada with only $2.1 billion of deals taking place representing the lowest value quarter since the database began in 2008.

Despite Canada claiming just 10.4% of the world’s oil reserves (1% excluding oil sands) it has historically held a disproportionate share of the global oil & gas M&A volume. In 2012, deals in Canada accounted for 21% of the global deal value and 17% of the total deal value for the period from 2009 to 2011. For the past two quarters, however, assets in Canada have been responsible for just 7% of the global deal value. Deal volumes in Canada have historically been helped by the country’s resources being held by a large amount of public companies with a strong support industry, a government with a Laissez-Faire attitude towards foreign investment and its position as neighbour to the United States, the world’s biggest importer of oil.

The US however has been undergoing a mini revolution in its oil industry in recent years. Since 2010, oil production has increased by 18% whilst in the same period oil consumption decreased by 3% as industry switched to cheaper gas products where possible and the economy remained sluggish. This has led to oil imports into the US decreasing by 13% from 2011 to 2012 to reach a still sizeable 9.7 million barrels per day in 2012. In the same time, gas production has increased by 13% and consumption by 6%. The driver behind this turnaround has been a steady escalation of shale technology and deployment in both gas and oil plays, which is expected to continue in the foreseeable future. There is still plenty of room within the United States imports to sustain Canada’s oil industry (US oil imports are 7 times greater than Canada’s oil exports) but unless OPEC drastically cut its production quota, it’s unlikely that we will see oil prices rising far above $100 on a sustained basis which will means the oil M&A sector is unlikely to see frenzied activity in the near future.

This trend is also seen in the first half of the year in financings, as discussed in another recent CanOils article by Nikki Zenonos.

For the 43 oil and gas M&A deals that did occur during the quarter, the total deal value was surprisingly weighted slightly towards the struggling natural gas sector, with $1.2 billion of deals taking place for assets which had a greater than 50% gas production or reserve profile. This value is heavily skewed however towards just one deal that accounted for $1 billion, when Centrica and Qatar Petroleum teamed up to acquire the majority of Suncor’s conventional oil and gas assets in Alberta and British Columbia.

There is little short term business logic in spending a large amount of money to acquire natural gas assets in Canada, in the country’s only current viable gas export market; the United States, the benchmark price ended the second quarter at $3.57 per mcf and US gas imports stood at just 4bcf/d, which is less than half the level of 4 years ago. The Suncor assets, however, are being acquired for a competitive cost of $1.06 per mcfe on a 2P basis and include significant upside of 3TCF of contingent resources. The current production level represents a reserve life just shy of 11 years (43 years including contingent resources) which gives Centrica and Qatar Petroleum ample opportunity to play a waiting game until Canada or the United States builds up its LNG export industry to ease the pressure on the market price of natural gas in the region.

One company that bucked the risk-averse disposition of its peers is Whitecap Resources who entered into two $100 million+ deals during the quarter. The first deal was the $110 million acquisition of Dodsland Viking light oil assets in Saskatchewan from an undisclosed seller, which includes existing production and unbooked land. The second deal was worth $174 million and involved the acquisition of Cardium light oil assets in Garrington and Valhalla in Alberta. Prior to this deal, Whitecap were still digesting the $550 million acquisition of Midway Energy from early 2012 and the more recent acquisition of Invicta in Q1 2013 for $63 million. This left the company with a debt-to-equity ratio of 36.7% as per their latest financial report. To finance the deals, Whitecap chose to put the onus onto its shareholders via share placings rather than see its debt-to-equity level rise over 50% and potentially set alarm bells ringing with the investment community. Despite this method of financing diluting the share base by over 20%, the share price of Whitecap still rose during the quarter by 12% versus a -4.9% drop in the S&P/TSX Composite Index in the same period. The reasons for the positive reaction is that the assets were over 70% oil in terms of reserves, included existing production and on a combined basis equated to under $20 per barrel without including the value of the unbooked drilling locations.

Against the conventional view that recent stock market levels have led to them being overvalued, Brookfield Asset Management Inc. chose to take 2 companies private this quarter in cash deals. The idea that the market is overvalued has been mainly directed at the United States and although the TSX has for a long time obediently tracked the movements of the NYSE, this trend diminished in the past 12 months (according to Canoils data the Price/EBITDA Per Share ratio for each company as per their latest financial data was significantly less than 2x). Brookfield firstly acquired Insignia for a deal worth $87 million, which included $9 million of debt assumption. Although the debt level points to a company that isn’t in a distressed position, the assets of Insignia are predominantly gas, which as a resource represents what will be a distressed market for at least 5 years. Cutting back on capital spending and suspending wells in non or low profit making areas is not the kind of press release that satisfies the general investment market, so Brookfield will have more success in hibernating certain assets than Insignia could have done.  The other privatisation effected by Brookfield was the acquisition of Second Wave Petroleum who conversely had a seemingly good portfolio weighted towards oil, but a legacy of high capital spending not manifesting into high production left the company laden with debt ($104 million of the total $129 million acquisition cost was made up of debt assumption). What will hurt the shareholders of Second Wave who stayed loyal the most will be the fact that the company had an expression of interest in February 2012 back when the company had a market capitalisation of $274 million which was not exploited at the time.

This report was created using CanOils’ M&A database which tracks all Canadian TSX and TSX-V listed E&P M&A deals on a daily basis and provides a comprehensive set of deal metrics. CanOils also tracks daily financings, provides 10+ years of historical financial and operating data for TSX and TSX-V listed oil & gas companies as well as guidance, forecasts and an extensive oil sands product.

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