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According to Sayer Energy Advisors, the oil patch racked up just more than $50-billion worth of mergers and acquisitions in 2014, comprising purchase prices plus assumed debt.

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The letter that Crescent Point Energy Corp. fired off to oil-field service companies in November, 2014, landed with a thud.

The missive, from Crescent Point's chief executive, Scott Saxberg, and chief operating officer, Neil Smith, asked suppliers for 30% cuts in rates for drilling wells and a host of other services in the field. At first, it looked like a pressure tactic by the busiest oil developer in Saskatchewan, where it drills the Canadian portion of the prolific Bakken shale formation. But the letter would prove to be a lifeline from the company as crude prices cratered.

"It actually created quite a shakeup with all the service providers, because it was a little bit in advance of the bigger downturn," says Saxberg, whose company (No. 47 on The Top 1000) has been resilient as crude's collapse has ravaged much of the industry. "It was interesting, because no one had done that before, I guess. But they were very receptive."

They had few options. Crescent Point, at the tail end of a bumper year for energy, had started to cut back on spending plans to cope with sharply lower oil prices. Hedging of oil and currency rates also gave it some much-needed breathing room as U.S. benchmark prices fell into the low $40s (U.S.) per barrel—more than 50% below the price of just half a year earlier. But the company and its suppliers faced a choice: Maintain the prevailing service rates and blow through much of Crescent Point's budget in the first three months of 2015, or cut costs and keep drilling through the year.

"Because we were able to get the drops in costs sooner in the year, we could then plan activity levels that could keep them busy through the downturn so they are not laying off staff. That was our rationale for sending out that letter as early as we did," Saxberg says.

Now, Crescent Point is among the rarefied oil-patch group taking advantage of an acquisition market rife with choice assets as commodity prices languish. In late May, the company acquired Legacy Oil + Gas (No. 953) for about $563 million in stock, as well as the assumption of almost $1 billion in debt.

Legacy thus became a poster child for a syndrome in the oil patch: producers that can no longer afford to plow big bucks into developing properties while also paying down debt. Such problems have shoved the oil patch into high-risk territory for investors. By December, the Toronto Stock Exchange's oil and gas subindex had shed more than 40% of its value in about six months, versus a 10% drop in the S&P/TSX Composite Index. Gains this year have been minimal, and the market is also anxious about how Alberta's new NDP government might rejig the royalty structure in the province.

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Those companies riding (comparatively) high today went into the crisis looking like Crescent Point—low operating costs in prolific regions and manageable debt. They are run by experienced managers who have been through other commodity crises, such as the last downturn in 2008-'09, which accompanied the global credit crunch.

The largest players in that group are diversified, like Suncor Energy Inc. (No. 12) and Husky Energy Inc. (No. 29). They are cushioned by their refining and marketing businesses, which can counter the effect of a weak crude market so long as fuel retail prices are slower to drop. And they've been able to pull back on big-ticket projects without short-term production losses.

In exploration and production, the ranks of the prudent include Canadian Natural Resources Ltd. (No. 5), Tourmaline Oil Corp. (No. 49), Whitecap Resources Inc. (No. 51), ARC Resources Ltd. (No. 62) and Peyto Exploration & Development Corp. (No. 77). Some investment pros have pinpointed such well-positioned players rather than selling out of the sector altogether.

"What we've been doing is buying the buyers," says Mason Granger, portfolio manager at Sentry Investments. "We want to own the companies that have less financial leverage—that are in a position to opportunistically acquire assets in a depressed environment. The commodity's going to come back and we want to own the ones that will be stronger going out the other side."

The crisis has been particularly tough on oil-field service companies, which spend heavily to manufacture new gear and to staff up when demand dictates, leaving them with unused capacity when the markets go sideways. Requests for rate cuts, like Crescent Point's, started to pile up early this year. Service providers such as Calfrac Well Services Ltd. (No. 187) and Canyon Services Group Inc. (No. 212), both fracking specialists, have geared down quickly. Shares in both have been lopped in half since last July.

The oil-field service companies are left with few options when commodity prices crash and producers claw back spending. They must either fight each other on rates—sometimes for less than cost—or idle equipment and crews.

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There's no question the collapse in crude prices in late 2014 caught much of the Canadian oil industry napping. A large chunk of the sector, from oil sands development to shale oil and gas, was built on expectations that crude would hover somewhere above $80 (U.S.) per barrel and that investors would be happy to keep shovelling in capital. Indeed, 2014 was a bumper year for equity financing, including an initial public offering, and then a secondary deal, for PrairieSky Royalty Ltd., valued at $4.3 billion in total.

Before things got tight, some Canadian producers tried to attract U.S. investors who, finding the market picked over at home, sought explorers to discover the next major resource play—something like the Eagle Ford in Texas or Bakken in North Dakota. They are comfortable with more debt than Canadian investors typically are, and some producers did borrow more to ramp up drilling.

By late summer, though, the landscape had started to shift, as the International Energy Agency and other bodies tempered expectations for growth in oil demand due to slowing economies in Europe and, most startling, Asia. At the same time, Saudi Arabia began to signal its annoyance at the relentless gains in U.S. light crude output and threats to its market share by other producing countries. OPEC's most powerful producer had no intention of reining in its own output while the U.S., Canada and others outside the cartel pumped full out.

North American spot crude prices sank to a low of $43.39 (U.S.) a barrel in mid-March, from more than $100 (U.S.) in July, 2014. On the way down, prices forced Canadian producers to take emergency measures: cuts to spending, followed by slashing of dividends and, in many cases, the jettisoning of staff. The Canadian Association of Petroleum Producers has estimated that capital spending in Western Canada will slump to $46 billion this year from $69 billion in 2014. Producing companies have slashed 4,500 jobs—many of them in the oil sands, home to the country's highest-cost projects. Another 23,000 energy jobs have been lost in Canada due to shrinking drilling activity.

In April and May, oil prices started a slow recovery, but the atmosphere was still anything but bullish. In fact, Goldman Sachs predicted that Brent oil, the global benchmark, will be just $55 (U.S.) a barrel in 2020, versus more than $110 last year. (It's worth remembering, however, that the investment bank's recent bearish calls have overshot the mark.)

In this environment, debt looms large as the dividing line among companies. Investors typically get nervous when total debt exceeds about two times a company's annual cash flow. And cash flow across the industry has fallen sharply with oil prices. For Legacy, the target for Crescent Point, debt had ballooned to about eight times its expected cash flow.

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Several debt-heavy firms, including Penn West Petroleum Ltd. (No. 998) and Trican Well Service Ltd. (No. 644), have gone cap in hand to lenders to negotiate relief on the terms of their debt. Lightstream Resources Ltd. (No. 988) obtained breaks on its high debt in May, agreeing to cancel any dividends until lenders say it's okay to resume them. In the meantime, CEO John Wright hopes to sell assets, including the company's Bakken holdings, and has said that to preserve cash, it will drill no more wells this year.

For Peyto CEO Darren Gee, though, such actions are a world away. He has been dealing with the reality of depressed commodity prices since around 2008. Natural gas makes up nine-tenths of the company's production, and the shale-gas revolution in North America, which allowed the industry to tap trillions of cubic feet located close to large population centres, put a virtual lid on prices that remains today. Gas is now worth about a third of what it was a decade ago.

That means successful producers have to run lean. Some, like Encana Corp. (No. 7), gave up on discounted natural gas and switched focus to oil as well as gas rich in byproducts such as ethane, propane and butane. Encana's timing wasn't great, as it made more than $9 billion of oil acquisitions in 2014, just before prices collapsed.

However, Gee has maintained Peyto's course in Alberta's Deep Basin gas deposits, and the downturn allowed the firm to keep its drilling pace this year, but at lower cost, as service-providers cut rates to keep operating. The company has seen its total cash costs fall by about 29% from last year; capital costs are down 20%. "We were rubbing our hands together, thinking, 'Hey this is great. We're going to be able to drill wells cheaper and bring on the same reserves and production as we were a year ago, only we're not having to spend as much as we did,'" he says.

Now, some oil-patch veterans believe a takeover blitz could mark the next stage of the cycle of pain, as weaker players find themselves in financial hot water even as crude prices gradually recover. Legacy aside, would-be sellers are reluctant to hive off their crown-jewel properties at fire-sale prices.

"There are a lot more people staring at each other and more standoffs than anything," Crescent Point's Saxberg says. "You hear the rumours on potential transactions, but that's more of a stare-down effect that's happening between companies. I think there will be more activity in the fall."

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