For the first part of the Great Oil Patch Downturn, deal-makers lamented irreconcilable differences between asset buyers and sellers.
There was scant meeting of the minds on the prices for which energy asset sellers would be willing to let their holdings go versus what the market wanted to pay.
Indeed, asset sales are a key tool for keeping an energy firm's balance sheet in good standing when cash flow dwindles due to low oil and gas prices. Vendors, worried that commodity prices might recover in short order, don't want to accept a bid reflecting a flat or lower outlook. Buyers, meanwhile, hope to snap up assets for a price tag that reflects more negativity. After all, who doesn't like a bargain?
The result was a standoff, and the deal flow slowed at a time when many investment banking types had expected an uptick. It has forced the industry and its bankers to be creative.
Three years into the downturn, contingency arrangements that pay out if oil and gas prices improve and share issues to vendors have emerged as ways help put deals on track again. The $512-million acquisition of Cenovus Energy Inc.'s Suffield natural gas property by International Petroleum Corp., announced Monday, is the latest transaction to feature such a sweetener. IPC agreed to pay Cenovus up to $36-million more if U.S. oil averages $55-to-$60 (U.S.) a barrel and gas averages $3.50-to-$4 per million British thermal units over the next two years. Oil sold for about $52.21 a barrel and gas for $2.93 per mmBtu on Monday.
Cenovus's $17.7-billion takeover of ConocoPhillips Co.'s oil sands and Alberta Deep Basin gas assets included a wrinkle in which Cenovus agreed to make payments to ConocoPhillips in each quarter that the average Western Canadian Select heavy oil price exceeds $52 (Canadian) a barrel, calculated by multiplying the oil price by $6-million. The deal remains in place for five years, and for Cenovus it takes away some of the potential upside in a price recovery.
In addition, ConocoPhillips took 208-million Cenovus shares that it agreed to hold for at least six months. That lock-up expires in November.
In similar arrangements, Royal Dutch Shell PLC took about $4-billion of Canadian Natural Resources Ltd. shares when it dealt its Canadian oil sands mining assets to the Calgary-based producer, and Statoil ASA, which acquired 20 per cent of the stock in Athabasca Oil Corp., in its $832-million sale of its own oil sands holdings in late 2016.