The deal market has, once again, failed the oil patch.
Canadian Natural Resources Ltd. pulled plans to sell or share some of its Montney natural gas assets in British Columbia. In a statement Thursday, CNRL said it received "a number of expressions of interest," but none rich enough to persuade the company to sell.
Capital for energy companies, particularly junior oil and gas outfits, is scarce in Western Canada. This has put a damper on the deal market, leaving small companies in the cold and more established companies sitting on land they would rather sell or develop with partners. This means development in some parts of Canada's oil patch is slowing – and not just on the assets the sellers want to ditch.
CNRL was trying to sell or find partners on land containing 6.7 trillion cubic feet of natural gas equivalent. Its competitors have also put assets on the auction block, but even with a plethora of projects available, the market remains soggy.
"These projects are big capital projects," said Sandy Edmonstone, deputy head of global energy at Macquarie Capital Markets Canada. "In a market where there's not a lot of capital available to juniors, the buyers have to be much more selective on what they are purchasing."
Junior energy companies are the obvious buyers when it comes to their larger counterparts hiving off assets. Junior companies spring up and develop the bigger companies' leftovers, making juniors key to growth in Canada's energy industry. Companies such as CNRL and Talisman Energy Inc. want to direct cash toward their best land, and if they do not receive cash from asset sales, some of their projects could be sidelined or delayed as they seek cash.
Talisman wanted to sell the northern portion of its Duvernay holdings in order to fund development of its southern part. Companies from Europe and Asia were interested in the north Duvernay assets, chief executive officer Hal Kvisle said, but were not willing to pay a price that satisfied him.
Tom Pavic, vice-president of Sayer Energy Advisors, which specializes in mergers and acquisitions, said the flooded market isn't making it easier for potential acquirers.
"There are a lot of assets and opportunities on the market right now and there's not a lot of capital out there, specifically for junior domestically based oil and gas companies," he said.
But Talisman, unlike CNRL, is pinched for cash, so it has been pushed into trying to find partners on both its north and south areas of the Duvernay. CNRL, on the other hand, can afford to take assets off the block entirely and wait for the market to strengthen.
CNRL's Montney assets are in northeastern British Columbia. The Montney hosts liquids-rich natural gas. The zone is attractive because it could boom should B.C.'s liquefied natural gas export market flourish, and because it is rich in products such as propane and butane. These commodities fetch a better price than natural gas.
Private equity companies may help fix this imbalance. KKR & Co., one of the world's largest private equity funds, plans to open an office in Calgary next month. It would be KKR's first office in Canada.