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A Bonavista Energy pump jack near Airdrie, Alta., on Oct. 22, 2020.Todd Korol/The Globe and Mail

Scale has become the dominant buzzword in the boardrooms of Canadian oil and gas companies as the ripple effects from two megadeals in the United States spread across the global energy sector.

Merger and acquisition activity was already starting to advance in Canada’s oil patch when, south of the border, ExxonMobil Corp. XOM-N bought Pioneer Natural Resources Co. and Chevron Corp. CVX-N bought Hess Corp. in two historic transactions worth a combined US$112-billion earlier this month. Now, with lots of cash, little debt, rising stock prices and a need to keep up with the Joneses, Canadian oil companies are going shopping.

“We are very active today and, frankly, we are as active as we have been in a very long time,” Adil Kieray, head of energy M&A for Bank of Montreal, said in an interview from Calgary. “But I also see the trend accelerating.”

It has been two weeks since the last billion-dollar-plus takeover of a Canadian energy company, with Tourmaline Oil Corp. TOU-T agreeing on Oct. 16 to pay $1.45-billion in cash and stock for Bonavista Energy Corp. Peyto Exploration & Development Corp. picked up Repsol SA’s assets in Alberta’s Deep Basin for US$468-million in September. And earlier this year, Baytex Energy Corp. PEY-T bought Ranger Oil Corp. for $3.4-billion and Crescent Point Energy Corp. CPG-T paid $1.7-billion in cash for Spartan Delta Corp.’s assets in the Montney region of Alberta.

Mid-sized producers such as Surge Energy Inc., Kelt Exploration Ltd. and Advantage Energy Ltd. are seen by analysts as the most likely targets in the weeks and months ahead. Larger players such as Whitecap Resources Inc. and ARC Resources Ltd. are among those expected to be doing the targeting.

Scott Barron, head of Calgary investment banking at TD Securities, said it has become rare for him to have a conversation with oil and gas clients “where M&A doesn’t dominate the conversation.”

“Debt levels in the oil and gas sector are lower today than they’ve potentially ever been,” Mr. Barron said. “That provides a tremendous amount of financial flexibility to pursue M&A.”

Debt is not just down among oil and gas companies, but it is staying down. Energy producers in Canada are expected to cumulatively repay more than $19-billion in debt this year, according to an estimate BMO published in January.

According to Statistics Canada data, total liabilities of Canadian oil and gas extraction companies fell $16-billion from $292-billion in 2020 to $276-billion in 2022. If the BMO estimate for 2023 proves accurate, overall debt in the sector will end this year more than 12 per cent lower than where it stood in 2020.

“For the last couple of years, they’ve been paying down debt like mad and returning a ton of capital to shareholders,” said Keith Chatwin, a partner and head of the corporate group in Calgary for law firm Stikeman Elliott LLP. “What they haven’t been doing is drilling.”

Given a declining asset base is a fact of life in the oil and gas sector, Mr. Barron said companies are looking to replenish their drilling inventories through acquisitions. That can be more expensive than simply establishing new wells within their existing holdings – a process known in the industry as putting money down the drill bit – but it is also much faster, and in the wake of the Exxon and Chevron megadeals, producers are facing mounting pressure from investors to scale up as quickly as possible.

The current wave of consolidation could be similar to what occurred between 1998 and 2002, when 12 of the largest global integrated oil companies merged into five companies, Scotiabank analyst Paul Cheng said in a note to clients on Oct. 23.

“Every board has taken notice” of the Exxon and Chevron deals, Mr. Cheng said, and they will “need to position themselves both offensively and defensively. In the end, no board will like to be seen as inactive and be the last one without a good dance partner on the floor.”

It is the mid-cap producers, with valuations ranging from $500-million to $1-billion, that experts believe must be the next dancers to bust a move toward either merging with their peers or selling themselves to a more sizable entity.

“Right now we are seeing the big guys take out others but not as much yet of the smaller-sized companies doing deals to merge to get big enough to be interesting to buyers,” Janan Paskaran, a partner in the Calgary office of Torys LLP, said in an interview. “Those mid-cap players and the stress they are under to do something – I’m not sure investors are going to let them stay and just coast.”

“They’ve done their share buybacks. They’ve increased their dividends and reduced their debt, but I think a lot of investors are starting to ask ‘What are you doing now?’”

Some investors may not be willing to wait patiently for an answer to that question. Investor and public relations firm Gagnier Communications has prepared a white paper that will be sent to its oil and gas clients in the coming days warning of a potential rise in dissident shareholder activity.

“Having been involved in M&A and activism over multiple cycles across the global energy complex over the past 20 years, we believe that long-term institutional shareholders and professional shareholder activists will pressure companies to unlock value,” reads an excerpt from the document.

Stikeman’s Mr. Chatwin said it has been “ages” since oil and gas companies have had “all this powder” available to finance deals, but the diminished size of the Canadian sector and a limited pool of non-Canadian buyers will likely prevent even a hot M&A market from becoming a frenzy.

“Is there going to be more acquisition activity? Of course, but what is left to acquire? There are only so many players on the field now,” he said.

The total number of publicly reporting oil and gas companies in Alberta has been cut in half in less than a decade. According to the Alberta Securities Commission, there were 136 oil and gas issuers in the province by the end of 2022, down from 303 as of late 2014.

Aside from the limited inventory, Torys’ Mr. Paskaran said there are additional forms of resistance to consolidation that could stifle the pace of deal-making.

“There is still complacency and there is no doubt still some management entrenchment,” he said. “Everybody thinks there should be consolidation, but everybody also thinks they should be the ones that survive the consolidation.”

Those concerns might be somewhat offset by what Mr. Barron said was increasing interest in Canadian oil and gas assets from U.S. buyers as Canadian energy stocks trade at a discount relative to their American peers.

“Share prices are also a lot higher today than where they were throughout the pandemic,” he said. “That has some companies re-evaluating their interest in selling.”

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