Last year Michael Binnion considered selling some of his company’s assets to focus on its core play in Alberta, but then changed his mind as oil prices kept plumbing new lows.
“In retrospect we really wished we’d sold,” the CEO of Questerre Energy Inc. said a week ago.
“It’s a hardship on me to envision lots of people saying ‘I would like to sell my oil assets at a price of US$30 per barrel,'” said the Calgary-based Binnion. “So anybody who is selling assets it’s because they have looked at all other options and decided that’s the best one.”
The quantity of wealth that’s been destroyed in Calgary is staggering
To sell or not to market within the worst bear oil markets inside a generation has gnawed at management teams across Calgary during the past year.
According to Zachary George, an activist hedge fund manager at FrontFour Capital Group Plc. in Connecticut, more than 500,000 barrels per day of Western Canada production are up for sale.
But buyers are biding their time, as valuations are difficult to calculate in the volatile environment.
“The quantity of wealth that’s been destroyed in Calgary is staggering,” said George, whose father Rick ran Suncor Energy Inc. for two decades till 2012.
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“In certain cases, you see zombie equities that are basically trading at option value with bonds trading in the fifties. Buyers aren’t stupid – they begin to see the capital structure and the implied enterprise value. Why must they attribute value towards the equity when the marketplace is telling them there’s none?”
Yet more assets are visiting the marketplace. A week ago, Ernst & Young Inc., the court-appointed receiver of bankrupt company Spyglass Resources Corp., put the company’s assets on the block.
LGX Oil & Gas Ltd. has also said it’s considering an outright sale of the company. The little Alberta-based operator joins a list of 22 companies within the Canadian oilpatch publicly seeking to sell themselves, based on Sayer Energy Advisors, that is serving as LGX’s adviser. Another 41 information mill selling some of the assets, with lots of more informally putting feelers out.
“There are many companies looking at alternatives which have not provided a public announcement or a formal process,” said Alan Tambosso, president of Sayer Energy Advisors.
But activity remains subdued. This past year, Canadian upstream M&A reached $12.4 billion, down 71 percent from 2014 levels, based on RBC Capital Markets.
This year might be boosted by Suncor’s $4.3 billion bid for Canadian Oil Sands Ltd. which in fact had turned nasty, but seems set to achieve an amicable closure soon. Regardless of the rise of activism in the usually-congenial oilpatch, there might be few hostile deals, said Chip Johnston, Calgary-based partner at Stikeman Elliott LLP.
“M&A is also a sign of the great times when the music is pumping and drinks are flowing,” Johnston said. “But when capital isn’t available so when commodity prices are depressed you don’t get exactly the same incentive.”
The recent federal and provincial policies associated with global warming policies and prolonged reviews of pipelines increases the gust of headwinds facing the Canadian oilpatch.
But many companies’ financial plight could trigger M&A activity. Many firms responded early to the steep decline in oil prices last year by cutting capex, shedding staff, divesting assets and shelving projects. But 2016 is presenting its very own set of challenges.
Only nine percent of Canadian companies have hedged with this year, leaving them exposed to the current depressed market prices, energy consultancy IHS Inc. estimates.
“People now realize that the time to wait for better days may be over,” said Barry Munro, Canadian oil and gas leader at Ernst & Young. “There is really a perception of ‘have to, need to or want to’ as driving M&A behaviors. There is a whole couple of people that ‘have to’ transact.”
Canadian banks are also getting nervous, as gas and oil players had drawn $45 billion by the end of October, when compared with $23 billion this year, DBRS Ratings Ltd. data shows.
“The banks – contrary to public belief – have been forceful and they’re getting good forceful,” Tombasso said, noting the 20 installments of receivership – or Companies’ Creditors Arrangement Act (CCAA) – this past year, compared to the eight typically in previous years.
Banks may be more motivated to act as they feel the credit redetermination season between February and April and assess their own rising risk profile.
In addition, the new U.S. Dodd-Frank banking law has specific rules for banks on rolling forward problem loans.
“Everybody type of skated through in the fall (the final credit review period) and there would be a big sigh of relief,” Munro said. “Nobody believes that they’ll cope with the next cycle in March unscathed. That’s put a large amount of pressure on folks.”
If prices recover in the second half of the season, as some analysts predict, banks might even push for transactions because they would rather sell in a stronger market, Munro warns.
With major gas and oil companies and state-owned enterprises struggling to justify new capital commitments to shareholders, the path may be clear for private equity and activist investors that have been prowling around Calgary over the past year.
As almost as much ast US$175 billion of private equity and pension funds are considering energy opportunities, BMO Capital Markets estimates.
But valuing assets amid price volatility is proving difficult for many institutional investors.
“You will see distressed investment opportunities over activist opportunities,” George said. “If you have the patience and stomach to work through some of the restructuring and CCAA processes, I think you will find going to be real opportunities.”
yhussain@nationalpost.com
Twitter.com/YAD_FPEnergy
