Page 9 - NorthAmOil Week 21

NorthAmOil COMMENTARY NorthAmOil
Canada looks forward to future deal surge
Canada’s oil industry is hoping for a resurgence of mergers and acquisitions, but only expects it to come after the world succeeds in rebounding from COVID-19
CANADA
WHAT:
Canada’s oil industry could experience a resurgence in deal- making activity in the future.
WHY:
M&A activity has been derailed by the COVID-19 pandemic, and there are hopes it will eventually rebound.
WHAT NEXT:
Stronger companies could be in a good position to absorb weaker ones after the pandemic has subsided.
MERGERS and acquisitions (M&As) are among the activities that have been derailed by the coronavirus (COVID-19) pandemic. However, Canada’s oil and gas industry is now expressing hopes that deal-making will rebound once the pandemic has subsided – which is unlikely to be in the coming months.
This year, M&A activity stands to take a con- siderable hit, after it was already muted in 2019. According to M&A firm Sayer Energy Advisors, Canadian oil and gas transactions amounted to CAD8.0bn ($5.8bn) in enterprise value last year, which marked a 34% year-on-year decline from CAD12.1bn ($8.8bn) in 2018. And given the oil price volatility that has been seen this year so far, it is unsurprising that very little deal-making has been happening recently.
Not the right time
“Because there’s so much volatility, it’s very dif- ficult to get buyers and sellers together. Times like these where commodity prices are volatile, thosearetheworsttimesforustogetdealsdone,” Sayer’s president, Tom Pavic, was quoted by the Canadian Press as saying last week. “I think once you see a little bit of certainty or stability in com- modity prices, especially for oil, when we know what the new normal is, that will start some activity on the M&A front,” he added.
Pavic noted that it was difficult to assess the fair market value of companies when they were not cash flow positive at current futures contract prices.
And an additional hurdle is the fact that contract negotiations are likely to be something company executives prefer to carry out in person rather than virtually. Such negotiations would thus likely require a period during which social distancing measures are no longer required.
Pavic’s remarks have been echoed by oil company executives, who also believe that now is not a good time to strike deals. Among them are Canadian Natural Resources Ltd’s (CNRL) president, Tim McKay, and Imperial Oil’s presi- dent and CEO, Brad Corson.
“I think the bid-ask would be far apart at this time,” McKay said on CNRL’s recent earnings call in response to an analyst question. “I think we’re quite happy with the assets we have. We don’t have any gaps,” he added.
McKay’s comments came after his company was responsible for the largest oil and gas trans- action of 2019, buying Devon Energy’s oil sands assets for CAD3.8bn ($2.8bn). CNRL has been on something of an acquisition spree in recent years, and also bought Royal Dutch Shell’s oil sands assets in 2017 for CAD4.3bn ($3.1bn).
This falls within a broader trend whereby
Canadian companies have consolidated
their positions in the
oil sands in recent years, and could have new consolidation opportunities to look forward to further down the line.
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