Page 10 - NorthAmOil Week 21

NorthAmOil COMMENTARY NorthAmOil
foreign companies have exited the oil sands in recent years while Canadian companies have consolidated their positions and now dominate that industry. Now expectations are emerging that a new wave of consolidation will emerge after the pandemic.
“Obviously, there are a lot of assets that are unfortunately distressed given these economic conditions,” Imperial’s Corson said on his com- pany’s earnings call, also in response to an ana- lyst question. “My experience in M&A is that at these extreme points in the cycle, it can be very difficult to transact because buyers’ and sellers’ expectations become very different. [Their] view of what recovery might look like and the timing forthatisoftenverydifferent.”
The impact of the current market on M&A can also be illustrated by attempts – in various parts of the world – to renegotiate pending deals. Hilcorp Energy has successfully renegotiated its deal to buy BP’s Alaskan business, while HitecVi- sion has had similar success renegotiating a deal with Total in the North Sea. Other similar rene- gotiation efforts are underway, and while not all may succeed, sellers may be pushed into revising transaction terms in order to avoid losing deals altogether.
“The oil industry is revisiting its ‘before coro- navirus’ (BC) bids, and we envisage announce- ments from other firms as they re-price or repackage previously announced deals,” a Royal Bank of Canada oil and gas equity analyst, Al Stanton, was quoted by Reuters as saying.
Given the fact that further oil price volatility cannot be ruled out, the risk of dealing with such negotiations will also act as a deterrent for Cana- dian – and other – companies. This too points to the fact that buyers and sellers alike will prefer to wait until a new normal has been established
before entering into M&A negotiations.
What next?
The longer-term picture could prove to be dramatically different from the current M&A environment, as players that emerge from the pandemic in a stronger position would likely pursue consolidation.
“We believe that those companies that are the lowest-cost producers and have the ability to live within cash flows will not only survive but also will provide superior returns to their sharehold- ers into the future,” Whitecap Resources’ CEO, Grant Fagerheim, said. “Consolidation will take place; however, we anticipate that this will be delayeduntilwegetthroughthispandemicand oversupply crisis.”
Beyond these expectations, it is difficult to predict how M&As will play out, given how much uncertainty there is over what will hap- pen with COVID-19. This includes unknowns such as whether there will be new outbreaks that will prompt further waves of lockdowns, and how low the oil price could fall in a worst-case scenario.
On one hand, given the severity of the first wave of lockdowns, many countries could be far more prepared to spring into action earlier next time if necessary. On the other, the economic impact of these lockdowns could make them more determined to push ahead with reopening their economies with additional public safety measures in place.
Nonetheless, recent days have seen early signs of a gradual recovery start to emerge, with global supply cuts helping to boost crude prices. Oil companies in Canada and elsewhere will be hoping that, even with further volatility likely, the worst is behind them.™
Buyers and sellers alike will prefer to wait until a new normal has been established before entering into M&A negotiations.
Players that emerge from the pandemic in a stronger position would likely pursue consolidation.
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w w w . N E W S B A S E . c o m Week 21 28•May•2020