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An aerial view of an oil sands facility near Fort McMurray, Alta. (Jeff McIntosh/THE CANADIAN PRESS)
An aerial view of an oil sands facility near Fort McMurray, Alta. (Jeff McIntosh/THE CANADIAN PRESS)

Energy deals rebound in 2014 as shale plays trump oil sands Add to ...

Mergers and acquisitions in Canada’s energy sector have rebounded from a dull 2013 and look poised for a further pickup, driven by rapidly developing shale oil and gas properties rather than oil sands plays.

Interest in the sector was renewed after a cold winter boosted gas demand and as Middle East unrest hikes oil prices. A longer-term slide in the Canadian dollar that boosted producer profits has only reinforced the trend.

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“In the last little while we’ve had a very big boom in the commodities, a boom in expectations and a boom in liquidity,” including easy access to capital markets and debt financing, said Dan Barclay, head of BMO Nesbitt Burns’ Canadian mergers and acquisitions group.

“What comes out of that is M&A,” he added, predicting more this year.

Canada’s oil and gas sector saw an acquisition boom in 2012, driven by investments from state-owned companies that culminated with CNOOC Ltd’s $15.1-billion (U.S.) purchase of Nexen Inc.

A worried federal government cleared that deal, but slapped restrictions on foreign ownership of the country’s oil sands, which cooled buyers’ interest, as did concerns about the fate of TransCanada Corp’s stalled Keystone XL pipeline project.

In 2013 corporate acquisitions totalled just $12.4-billion, down nearly 80 per cent from the previous year, according to Thomson Reuters data.

There are some concerns that rising stock prices may dissuade some potential buyers, but six months into 2014, merger activity of about $15-billion has already topped last year’s total. Major deals include the $2.8-billion purchase of much of Devon Energy Corp’s Canadian natural gas properties by Canadian Natural Resources Ltd and Encana Corp’s $1.9-billion sale of Western Canadian exploration lands to private-equity interests.

The current round of acquisition activity has become more focused compared with prior years, with buyers looking for targets operating in very specific geographic regions.

“We see companies that we jokingly refer to as ‘having the right postal code’,” said Les Stelmach, a portfolio manager with Franklin Bissett Investment Management.

“Their land position is very good, within a very active part of the Western Canadian sedimentary basin, and they could probably do a certain amount of development on their own, but the pace of that could be vastly accelerated in the hands of someone else,” he said.

He pointed to companies operating in Western Canada’s premier shale fields, where the fracking technology that has revolutionized U.S. oil and gas production has also uncovered huge reserves.

In Canada, such fields include Montney region that runs from western Alberta and northeastern British Columbia, and Alberta’s burgeoning Duvernay field.

Painted Pony Petroleum Ltd, which holds nearly 120,000 acres of properties in the Montney region, has roughly doubled its stock price since the start of the year. Gas producer Birchcliff Energy Ltd.’s stock is up 94 per cent over the same period and Crew Energy Inc. has gained 73 per cent since the end of 2013.

Some analysts think the rise in stock prices has more to do with strong commodities than potential takeovers, and that potential acquirers might wait.

“[Commodity] prices have been moving up, especially with what’s been going on in the Middle East,” said David McColl, an analyst with Morningstar. “I think [buyers] would rather strike in a softer climate than right now.”

Still, some see the return of U.S. companies that abandoned much of their Canadian investments over the past few years as oil and gas prices softened. The new lures are massive reserves of Canadian shale fields and the potential demand boost offered by liquefied natural-gas (LNG) projects.

The possibility that one or more of the 15 liquefied natural-gas plants planned for British Columbia could be built has attracted buyer interest, particularly after Exxon Mobil Corp and Imperial Oil Ltd paid $3.1-billion (Canadian) for Celtic Exploration Ltd in early 2013. The two companies are now planning an LNG plant of their own after acquiring Celtic’s shale properties in Western Canada.

“I think the next wave of guys that are going to move into Canada are going to be the large intermediate-sized U.S. players,” said Sonny Mottahed, chief executive of Black Spruce Merchant Capital, which finances acquisitions. “Some of those have come and gone already,” he said, naming, as a possible example, Anadarko Petroleum Corp, which sold off the majority of its Canadian assets several years ago. “A lot of it is going to be fuelled by the drive to be part of the LNG process here,” Mottahed added.

Hess Corp, which has been shedding oil, gas and other assets it no longer considers central to its operations in order to concentrate on shale production, could be another, he said. Hess and Anadarko did not immediately respond to requests for comment.

While the appetite for shale properties strengthens, little activity is expected in the oil sands.

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