Canadian energy sector resurgent


Financier Worldwide Magazine

June 2014 Issue

June 2014 Issue

Since 2009, M&A activity in the Canadian energy sector has been locked in a pattern of decline. In 2013 there was a notable lack of public company M&A activity across the sector; furthermore, no transactions matched the most notable deals announced the previous year. PETRONAS’s $6bn acquisition of Progress Energy and CNOOC’s $20bn acquisition of Nexen, both announced in 2012, were two of the biggest deals completed in the energy sector for some time.

Overall M&A activity in Canada in 2013 slumped dramatically from the previous year, resulting in the lowest annual value since 2009. In total, 2500 deals worth almost $162bn were completed last year, representing a 23 percent decline in 2012’s total value of $212bn. The most notable deals of 2013 saw Suncor sell its conventional natural gas properties to Centrica and Qatar Petroleum for $1bn; Progress/PETRONAS pay $1.5bn for Talisman Energy’s Farrell Creek and Cyprus properties; and Exxon Mobil/Imperial Oil acquire part of ConocoPhillips’ non-producing Clyden oil sands acreage for around $750m.

Despite the ongoing pattern of depressed M&A activity, in the first quarter of 2014 the industry experienced a notable upswing. Deal activity in Q1 2014 rose by 20 percent year on year from the same period in 2013, reaching $35.7bn.

Investment in the industry has started to flow in from private equity (PE) firms.

The flurry of activity seen in Q1 was further reinforced in March when Whitecap Resources Inc announced it had agreed a deal to acquire Western Canadian oil and gas properties from Imperial Oil Ltd, in a deal worth around $855m. Although the Imperial Oil acquisition is not in the same league as the PETRONAS and CNOOC deals, the transaction pushed the industry’s tally for M&A activity for the first quarter to $7bn – almost 10 times the total for the first three months of 2013. Many analysts have pointed to this upswing, suggesting that the resurgence will continue throughout the rest of the year.

One of the main drivers for the upswing in energy sector M&A has been the rebound of Canadian energy prices. Indeed, energy prices across North America were driven up by the unusually cold and prolonged winter endured by the whole continent during 2013-2014. The record low temperatures caused by the polar vortex and other significant weather fronts led to a huge surge in energy consumption across both Canada and the US. Early last year, depressed gas markets and deep discounts for heavy Alberta oil also had a negative effect on the wider industry. However, the discounts, which were caused by major transportation bottlenecks, narrowed considerably throughout the first quarter of 2014. The reduction of the bottlenecks and the discount was brought about as more companies began to utilise the Canadian rail network to deliver supplies to the market. The opening of new pipeline capacity has also helped suppliers deliver more efficiently, which has been a huge benefit to the whole sector.

Improvements in energy industry M&A have coincided with a rise in investor confidence in the market. This is evidenced by the fact that many of the recently announced energy sector acquisitions have been backed by successful equity financings. In Q1 2014, over 630 acquisitions were announced, with nearly 180 equity deals seen in Canada during the quarter.

As conditions in the energy sector have continued to improve, investment in the industry has started to flow in from private equity (PE) firms. New York-based Evercore Partners and a partner are hoping to follow in the footsteps of PE giant KKR & Co by exploring the possibility of establishing an office in Calgary. Furthermore, KKR is reportedly creating a $1.5bn fund to target mineral and oil and gas developments in Canada. Of late, large companies have begun to divest their non-core assets boosting opportunities for acquirers in the oil and gas sector. Many smaller companies have also looked to sell stakes to fund their own growth plans. PE giant Warburg Pincus has taken advantage of these opportunities of late – the firm has made seven acquisitions in the Canadian oil and gas sector in recent years.

Undoubtedly, M&A activity in the Canadian energy sector has been disappointing for the last few years, however the outlook for 2014 and beyond looks more encouraging. As the market’s 2014 renaissance continues, it may also provide a positive stimulus for M&A activity across other Canadian sectors.

© Financier Worldwide 


Richard Summerfield

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