An oil pumpjack sits unused in a field North of Edmonton Alberta February 8, 2013.Jason Franson/The Globe and Mail
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A standoff between buyers and sellers of oil-patch assets could be nearing its end. Collapsing crude prices halted last year's $50-billion deal bonanza.
Recently, investment bankers have started to believe a shift to survival mode for many energy producers, especially those with high debt, is prompting a trickle of merger-and-acquisition activity.
Many would-be buyers are still on the sidelines, though, waiting for asset prices to come down further before pulling the trigger on acquisitions.
"To quote one client, 'I need to see more blood in the streets before I weigh in,'" said Shane Fildes, managing director and head of global energy for BMO Nesbitt Burns.
Oil producers and drillers have bled staff and cut deeply into capital spending to cope with oil prices that have slumped to around $50 (U.S.) a barrel from above $100 last year. If prices hover near today's levels, the number of properties on offer from large and small producers will increase as they seek proceeds to bring debt levels back in line with dwindling cash flow.
The big question is when there might be a meeting of minds between buyers and sellers on oil-price forecasts and property value.
"Ultimately, whenever you see big macro moves like we've seen in the oil price, for a period of time it widens the bid-ask spread," Mr. Fildes said. "Vendors, maybe, are saying this is temporary and buyers are using the strip [long-term futures] price and saying, 'This is the market.'"
They had little problem agreeing last year, when the sector's deal value rocketed to the second highest since the start of this century. According to Sayer Energy Advisors, the oil patch racked up just over $50-billion (Canadian) worth of mergers and acquisitions, a number comprising purchase price plus assumed debt. (It includes Repsol SA's $15.1-billion takeover of Talisman Energy Inc., announced in December but slated to close shortly.) The year before, the value of oil patch deals limped in at $13.8-billion.
Much of the action last year took place in the first nine months, when companies scooped up assets across Western Canada as well as in U.S. shale oil plays. Investors were only too happy to plow money in to help finance deals, making the sector fertile ground for equity issues, including a number of initial public offerings, such as those for PrairieSky Royalty Ltd., Journey Energy Ltd. and Seven Generations Energy Ltd.
Now, rather than pruning assets to better focus operations, companies are looking to shore up finances.
"Last year was really about portfolio optimization – companies selling things and redirecting capital to assets they prefer and that give them better risk-adjusted returns. Now, the trend is going to be more towards balance-sheet optimization," said Michael Freeborn, head of energy, investment banking at Canadian Imperial Bank of Commerce.
Mr. Freeborn believes there could be a shift to more unsolicited deals, as well-funded players and private-equity funds see opportunities amid the downturn. "We haven't seen much yet, but when you have these periods of radical dislocation and balance-sheet pressure, those are some of the ingredients to hostile [bids]," he said.
The deal flow has picked up in recent weeks. This month, Bonterra Energy Corp. bought assets in the Pembina Cardium region of Alberta from Enerplus Corp. for $172-million. Raging River Exploration Ltd. acquired southwestern Saskatchewan assets for $35.6-million from Surge Energy Inc. Torc Oil & Gas Ltd. bought assets in southeast Saskatchewan from a private company for the equivalent of $128-million in shares. Last week, Kelt Exploration Ltd. made a bid for Artek Exploration Ltd, offering $307-million in shares.
The latter two could be a sign of deals to come, as companies in decent financial shape find they can use their stock as currency, even if their share prices are lower than they were in 2014, said Nick Johnson, managing director, corporate finance at FirstEnergy Capital Corp.
Still, the volatility in crude prices remains the main factor complicating the M&A market.
"Everyone's looking for stability, and the fluctuations in oil prices – a 15-per-cent [variation in the oil-futures] front month over the course of a week – is creating challenges. And the challenges are on both sides," Mr. Johnson said.
Jeffrey Jones