Canadian oil patch braces for more deals after record start to 2021
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[March 23, 2021] By
Maiya Keidan and Rod Nickel
TORONTO (Reuters) - Mergers and
acquisitions in Canada's oil and gas sector had a record start to the
year in 2021 as companies took advantage of improved oil price
expectations amid the pandemic recovery, and many industry participants
expect the trend to continue.
The flurry of deals underscores the Canadian energy sector's desire to
grow to benefit from the rebound in oil prices as global fuel demand
picks up. It also reflects smaller companies betting on economies of
scale.
"As the funding markets have opened back up off the rebound in commodity
prices, you're going to see more of those asset deals, and you'll see a
lot more of similar-sized companies coming together," said Luke Gordon,
head of Canadian mergers and acquisitions at Goldman Sachs.
Oilfield services provider Secure Energy Services' proposed C$478
million merger with Tervita Corp this month took year-to-date Canadian
energy sector deals to a record $18 billion, according to data from
Dealogic.
Canadian energy sector deals made up 16.2% of global volumes of $111.4
billion between the start of the year and March 18, the highest amount
since 2002, the data showed.
While U.S. year-to-date activity totaled $26.1 billion, it was below the
record $83.6 billion in 2017.
Graphic: Global energy deal values, 1995-2021 (Q1) Global energy deal
values, 1995-2021 (Q1) -
https://graphics.reuters.com/CANADA-ENERGY/GRAPHIC/
xklvyrberpg/chart.png
Graphic: Canada energy deal values, 1995-2021 (Q1) -
https://graphics.reuters.com/CANADA-ENERGY/GRAPHIC/
xlbpgxzrmvq/chart.png
Investors are cheering the deals, with acquirers' stock generally
climbing in the aftermath of announcements. Shares in Secure are up 10%
since the merger was proposed, outperforming the Canadian energy index,
which has fallen 3% over the same period.
'ORGANIC MODEL DEAD'
Stephen Duench, vice-president and portfolio manager at AGF Investments
Inc, said a lot of the debt-laden small-cap companies also have good
assets and M&A helps them to unlock the value of these assets.
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General view of the Imperial Oil refinery, located near Enbridge's
Line 5 pipeline, which Michigan Governor Gretchen Whitmer ordered
shut down in May 2021, in Sarnia, Ontario, Canada March 20, 2021.
REUTERS/Carlos Osorio
"We've had quite a remarkable bounce-back in the markets and within the
energy sector, so that probably accelerated a lot of these guys" to go
ahead with the deals, he added.
Grant Fagerheim, chief executive officer of Whitecap Resources, a Calgary-based
oil and gas company, expects the consolidation to continue.
"What we're expecting is a tighter credit environment, with fewer lenders and
higher-cost debt," he said. "I feel we are in the third or fourth inning of a
nine-inning game."
Credit spreads are widening as banks re-evaluate their risk appetite for smaller
producers, Fagerheim said. As a result, some producers are looking to grow.
Whitecap executed two deals in the second half of 2020 using stock to buy rivals
Nal Resources and TORC Oil & Gas, which allowed it to reduce debt, Fagerheim
said, in a type of deal likely to be replicated.
The recovery in oil prices from last year's lows means more companies are
incentivized to move ahead with deals.
"The organic growth model is dead," said Adam Waterous, chief executive of
Canadian private equity firm Waterous Energy Fund, which this month completed
its takeover of Osum Oil Sands Corp for C$171 million ($137 million).
"Puff Daddy said it all: 'It's all about the Benjamins,'" he said, referring to
the American rapper's song about the U.S. $100 bill. "If Canadian companies want
access to U.S. investors' cash, they have to gain scale," he added.
($1 = 1.2494 Canadian dollars)
(Reporting by Maiya Keidan in Toronto, Rod Nickel in Winnipeg and Nia Williams
in Calgary; Editing by Denny Thomas and Dan Grebler)
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