Suncor Energy Inc.’s closure of their $6.6 billion Canadian Oil Sands Ltd. purchase Monday and TransCanada Corp.’s US$13.3 billion proposed acquisition of Columbia Pipeline Group point to a recovery in M&A deals, using the segment enjoying its best year-to-date performance since 2009, based on data.
“You possess a bit more upward momentum in oil prices and the fire is burning a bit brighter,” said Chip Johnston, an M&A lawyer with Calgary-based Stikeman Elliott LLP.
Sixteen Canadian oil and gas proposed deals valued at approximately $19 billion year-to-date dwarf the $2.4 billion in 27 deals throughout the same period this past year. The 2016 figure, while boosted by the TransCanada deal, doesn’t include Imperial Oil Ltd.’s recent $2.8 billion divestment of gasoline stations.
Frank Turner, someone at Calgary-based Osler, Hoskin & Harcourt LLP said there is optimism for additional deals this season as many in the market see oil languishing at affordable prices for extended.
“You didn’t visit a large amount of M&A in 2015, but 2016 could be different,” Turner said. “Some companies’ strategy ended up being to hang in and ride it out, but for some genuine enough runway to pursue that strategy. They have to do something else.”
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While U.S. oil prices have increased more than Half since their lowest reason for January – they crossed US$40.06 per barrel Monday – many Canadian companies are not convinced they are able to keep your lights on.
Junior oil and gas producer Terra Energy Corp. said on Monday its directors and officers have resigned and it’s ceasing operations after its lender, Canadian Western Bank, demanded full repayment of its debt.
TSX-listed Bankers Petroleum Ltd. also decided to sell its Albania-focused assets to China’s Geo-Jade Petroleum Corp. for $575 million Monday.
Meanwhile, Penn West Petroleum Ltd. who has sold some of its assets for $230 million, included in a divestment technique to reduce the burden on its challenged balance sheet.
But analysts are concerned that many in the market remain asset-heavy and cash-poor.
“We see no reason to purchase this name and therefore reiterate our underperform rating and $0.50 target price,” said Kyle Preston, analyst at National Bank Financial, noting the sale of Penn West’s high netback assets worsens the business’s debt-to-cash flow ratios.
Johnston thinks M&A markets might have found their sweet spot as oil prices are rising but remain low for the foreseeable future, leaving a lot of companies distressed.
“That’s an advantage for businesses with healthier balance sheets that see transactional activity, when compared with managements conceding they can’t proceed with what they have.”
Rising equity offerings are also contributing to the enthusiasm and underscoring investors’ willingness to finance expansions and acquisitions. Canadian gas and oil companies raised $3.17 billion in 10 transactions within the first couple of months of the year, it is best start since 2012, and 40 per cent greater than exactly the same period this past year.
And there’s no shortage of funds when the right deal comes along. Canada’s five major gas and oil companies are also located on an US$8.5 billion pile of money, based on Bloomberg data, but many are keeping their powder dry to wait out the severest price downturn inside a generation.
“The speculation was these companies would reinvest within the sector, and employ it as a war chest for investments and acquisition,” said Turner. “I don’t know, I think some of the people information mill simply because like a hedge against a sustained downturn within the commodity price.”
Imperial Oil sold nearly 500 of its gas stations for $2.8 billion this month, but snuffed out speculation of a purchase by seeking a permit to construct an in-situ Cold Lake project.
The announcement “could throw some cold water” on market theories regarding any potential oilsands acquisitions that Imperial may pursue because the application represents another organic growth avenue, said Greg Pardy, analyst at RBC Capital Markets.
Private equity and pension funds might be more likely drivers of M&A activity, said Stephen Griggs, ceo of activist investor Smoothwater Capital Corp.
“You will notice a lot of private equity investors headed up by smart people out patrolling for distressed firms that are fundamentally very valuable – they just possess the wrong capital structure.”
Toronto-based Smoothwater disagrees with the board on the future means of Alberta Oil Sands Inc., a business that finds itself within the unique position of getting very little debt and $35 million in cash as compensation by the Alberta government for cancelling its leases.
Smoothwater, which announced it had raised its equity to 10 per cent within the junior company, believes Alberta Oil should return cash to shareholders and effectively “wind the company up”, instead of use the funds for a transaction.
“There are many others that look interesting,” said Griggs, although another transaction is not imminent.
While peer-to-peer deals between major companies might be sporadic, opportunistic activists and long-term investors for example pension funds, private equity and even Asian investors may start to kick tires of Canadian assets, drawn by the lower loonie.
“Chinese outbound investment continues to be obtaining after seeing dropping very significantly. I believe Canada many start to see a number of that as well,” says Turner, who advises Osler’s Asian clients.
Financial Post
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