A stunning four-month turnaround in Canadian oil and gas mergers and acquisitions (M&A) was underlined on Monday with Whitecap Resource's $855-million deal for some oil and gas assets owned by Imperial Oil.
Since November of 2013, the Canadian M&A market has seen more than $8-billion in transactions.
The largest deals include Talisman Energy's sale of Montney assets to Petronas for $1.5-billion, Baytex Energy's acquisition of Aurora Oil and Gas for $2.7-billion, Canadian Natural Resources' purchase of certain Devon Canada assets for $3.125-billion, and now the Whitecap deal. Scotiabank advised either the buyer or seller on all four transactions.
By contrast, in the 12 months following Ottawa's announcement in December, 2012, of guidelines for state-owned enterprises (SOEs) in the oil sands, there has been little oil sands M&A activity and total M&A in the broader Canadian oil and gas market faltered, with only $11.8-billion in announced transactions, a 72-per-cent drop from the previous 12-month total of $42.1-billion.
A review of the four recent transactions shows that the change in ownership in each case strengthened the Canadian company. The driver of each deal was the seller's capital allocation discipline and the buyer's development expertise.
Talisman, for example, had concluded that its Montney position in British Columbia was best suited for a liquefied natural gas (LNG) project. However Talisman did not have the required financial resources, so it elected to cautiously develop the property with a modest drilling program, while also attempting to sell the asset. The eventual buyer of the majority of Talisman's position, Petronas, has very aggressive plans to drill the land as it requires feedstock for its huge LNG project. Now Talisman can take the capital raised from the sale and deploy it in more promising projects, such as its Duvernay assets in Alberta.
Baytex, on the other hand, had been looking to leverage its success in exploiting heavy and unconventional oil reserves in Canada, and expanding its asset base to new plays. Aurora had an exceptional position in the Eagle Ford shale in Texas, which is by far the most successful unconventional oil and gas play in the world. Production from the Eagle Ford has increased from almost nothing four years ago to 1.7 million barrels of oil equivalent per day today. Now Baytex is able to leverage its experience from the Eagle Ford to better exploit its Alberta assets.
As for the Canadian Natural Resources (CNR) deal, Devon had decided several years ago to prioritize development of its heavy oil and oil sands assets in Canada. Consequently, production from these properties had been falling for many years. Today CNR sees substantial operational synergies combining these assets with existing CNR properties.
Strategically, Whitecap's acquisition shares many similarities to the CNR purchase of the Devon assets. Imperial strategically prioritized the development of its heavy oil, oil sands, and unconventional asset base in Western Canada. Imperial was restricting investment in the assets, leading to several years of decreasing production. Whitecap is focused on these types of properties and plans significant capital investment to ramp up future production.
Thanks to the changes in ownership and direction resulting from M&A, these Canadian companies will increase production, as well as their payments to provincial governments and Ottawa in the form of higher royalties and taxes. The companies that bought the Canadian conventional assets in these recent deals were ready and able to compete in auctions for the properties.
By contrast, since the SOE investment guidelines, the oil sands sector has far underperformed the broader oil and gas industry. In that time, the average publicly traded junior oil sands producer has achieved total returns to investors of minus–22 per cent, compared to the broader oil and gas S&P/TSX producers' return of plus-23 per cent. The guidelines reduce the ability of investors to exit an investment through an M&A transaction. And lower stock prices have increased the cost of capital, making it more difficult for Canadian companies to finance expansion of the oil sands.
In the oil and gas industry, we like to say that "M&A leads to assets finding their rightful home," meaning that through differences in capital allocation priorities, buyers will more aggressively develop the assets than the sellers. This market force needs to be active in the oil sands, even more so now, with SOEs constrained as potential buyers.
Adam Waterous is global head of investment banking at Bank of Nova Scotia