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The return of weakening oil prices threatens to slow the deal flow in the energy sector.
Oil-patch merger and acquisition activity has surpassed last year's on a combination of receptive equity markets, tougher borrowing capability and the desire among players with financial muscle to seek bargains in key areas amid the wreckage of the downturn.
However, crude prices have dropped by about a fifth since the first week of June into the low $40s (U.S.) per barrel, sapping what had been a steady, four-month rebound. A dip back into the $30s would make would-be buyers nervous as their own share prices take hits. U.S. benchmark crude closed up 46 cents at $41.60 a barrel on Friday.
"If the producers continue to drift lower with oil prices – if the bottom falls out – you're certainly not going to see any equity being raised and by default you're going to see less deal flow," said Martin Pelletier, portfolio manager with TriVest Wealth Counsel.
The commodity and stock price trends are starting to look eerily similar to last year, when they surged in the late spring then drooped to multiyear lows by January and February, Mr. Pelletier said. The industry went into a funk during that period, slashing spending, cutting dividends and laying off workers.
In the first half of this year, the value of deals picked up smartly, as crude rebounded. The industry notched $15.5-billion (Canadian) of mergers and acquisitions, including assumed debt, during the period. That's up from $9.7-billion in the first half of 2015, according to Sayer Energy Advisors.
About half the total, though, was courtesy of Suncor Energy Inc., which bought Canadian Oil Sands Ltd. for $4.3-billion, plus $2.5-billion of assumed debt, and Murphy Oil Corp.'s 5-per-cent interest in Syncrude Canada Ltd. for $937-million.
Other big deals during the period include Teine Energy Ltd.'s $975-million purchase of Saskatchewan oil properties from Penn West Petroleum Ltd. and Birchcliff Energy Ltd.'s $625-million acquisition of Alberta natural gas assets from Encana Corp.
This month, Seven Generations Energy Ltd. bought assets in its main Alberta Montney region for $1.9-billion and Torc Oil & Gas Ltd. shelled out $89.5-million for oil assets in southeast Saskatchewan. Both had successful share issues to finance the deals.
Indeed, companies in good financial shape have found willing buyers for share issues to finance acquisitions, though equity issues have lagged last year, according to Sayer. The industry raised $6.4-billion in equity in the first half, down from $8.3-billion a year earlier. Again, Suncor was a headliner, raising $2.8-billion from an offering in June.
Debt financings dwindled to $500-million from $6.1-billion in last year's first half.
An investment banker with a major dealer said equity markets should remain pleased to finance attractive deals. "There is money on the sidelines still and I don't think investors had calibrated their price [outlooks] to $50 (U.S.) oil," the banker said.
He acknowledged, however, that there is fear that crude could dip back to $30 a barrel, even if the odds are still long.
Another lingering worry that could scupper deals is abandonment liability for companies that have entered bankruptcy proceedings, making their assets far less attractive.
In May, a court judgment in the Redwater Energy Corp. bankruptcy case came down on the side of a federal law that protects the interests of lenders and their secured loans over the province's environmental laws. The decision said receivers do not have to take responsibility for assets they deem to have no economic value – including well sites requiring costly cleanups beyond their current value.
The Alberta Energy Regulator is appealing the court's decision, and will require all companies purchasing Alberta oil and gas assets to have a higher ratio of assets to liabilities than was previously the case. Critics said the regulator's reaction to the court decision will slow down asset sales – although the AER has indicated some willingness to look at deals on a case-by-case basis.
With a report from Kelly Cryderman
Jeffrey Jones