Desperation fuels Canadian M&A activity
Offloadings accelerate as many domestic oil firms struggle to stave off bankruptcy
M&A activity is picking up in the Canadian oil patch following a dearth of deals in the first half of the year, driven to some degree by the dire financial straits in which many of the country’s small to medium-sized oil and gas companies find themselves.
Funding options, whether debt or equity, have largely dried up for these firms after a six-year downturn in Western Canada, culminating in the Covid-assisted oil price depression. In contrast, large producers—including oil sands heavyweights Suncor Energy and Canadian Natural Resources (CNRL)—continue to have no trouble tapping debt markets, and at reasonable rates.
In an attempt to avoid bankruptcy, smaller Canadian oil and gas companies—those producing 20,000bl/d oe and less—are selling assets, merging with their peers to try to improve solvency, or selling outright to better-financed larger oil firms and private equity firms looking to add assets at bargain basement prices.
The move by banks to cut the flow of capital to smaller Canadian oil and gas companies has been a key driver for greater M&A activity in recent months, as well as an increasing number of restructurings and bankruptcies.
>C$1bn – M&A activity in Q3
As the value of firms’ reserves has collapsed, credit lines have declined or been pulled altogether. According to consultancy Wood Mackenzie, reserve-based loans to the 18 Canadian oil companies it tracks have declined by C$1.8bn ($1.3bn), or 22pc, in the year-to-date.
These findings are supported by a new survey of Canadian energy investors and corporate executives by Canadian bank RBC, which found access to capital to be the most significant challenge—and potential ‘existential threat’— facing businesses over a three-year time horizon, polling at 57pc of respondents.
On that note, dozens of smaller Canadian oil and gas companies have filed for bankruptcy protection or restructured debt so far this year, including now defunct Bow Energy and Cequence Energy, while many more have assets up for sale to pay down debt. According to M&A tracker Sayer Energy Advisors, assets with an estimated value of C$1.2bn are currently being publicly marketed for sale, with substantially more assets not publicly announced.
In terms of Canadian M&A activity, the second half of this year has already exceeded the first half and appears to be picking up steam. Deals amounted to only C$750mn in the first half of this year compared with C$5.3bn in the first half of 2019, based on Sayer data. In contrast, there has been M&A activity valued at well over C$1bn in the third quarter.
Nowhere has this pattern of M&A activity been more apparent than in Western Canada’s Montney shale region, with larger and better capitalised companies, as well as private equity firms, targeting smaller producers with diminished access to capital.
The Montney tight rock formation, straddling Alberta and British Columbia (BC), has seen at least nine significant deals worth some C$2.3bn over the past year, with two of the three largest ones in the third quarter of 2020.
Dozens of smaller Canadian oil and gas companies have filed for bankruptcy protection or restructured debt
In late July, Kelt Exploration announced it was selling 140,000 acres of gas-bearing land on the BC side of the Montney to US independent ConocoPhillips for C$510mn, with the sale to cover debt and allow the company to continue to develop other land.
On 10 August, CNRL made a friendly bid of C$461mn—including around C$350mn in debt—to purchase Painted Pony Energy, one of the most promising gas players in the Montney.
The third major Montney deal over the past year, and possibly the best bargain, was the purchase of Pengrowth Energy by private equity firm Waterous Energy Fund (WEF). WEF paid C$740mn for debt-hobbled Pengrowth, representing a 75pc discount to its trading price when the acquisition was announced last November, as Pengrowth tottered on the verge of bankruptcy.