Just like the U.S. shale patch, the Canadian oil and gas sector has seen a flurry of merger and acquisition (M&A) announcements since oil prices crashed, as larger firms scoop up assets to diversify their portfolios.  Consolidation in Canada’s oil industry gained momentum at the end of October with a mega merger that creates the country’s third-biggest oil producer and the fourth-largest oil firm by market capitalization. Cenovus Energy and Husky Energy agreed to combine their businesses in an all-stock deal to become a leaner, stronger, and more integrated company better positioned to withstand the current downturn, as Cenovus president and chief executive Alex Pourbaix said.     

Analysts expect other Canadian companies will join the M&A trend, and executives at Canada’s top oil firms acknowledge that the time for consolidation has come. 

Yet, the potential buyers will be very picky in selecting possible acquisition targets, executives said, because buyers will be looking for value creation and quality assets above all, instead of just picking up companies and/or acreage at bargain prices. The same trend of buyers looking for quality complementary assets with low upfront capex is evident in the U.S. shale patch, too. 

In Canada, the Cenovus-Husky deal is the latest example of the ongoing consolidation, with analysts and industry professionals expecting more transactions over the next year. 

However, another deal of the Cenovus-Husky scale may be unlikely, Vincent Lauerman writes in Petroleum Economist.  

The Cenovus-Husky transaction was surely the biggest and most headline-grabbing consolidation announcement, but companies had already started to announce smaller deals in the months prior to October. Oil prices stabilized at around $40 a barrel in the third quarter, and companies reeling from the Q2 oil price and demand plunge recalibrated strategies and investment plans to survive the downturn. The fresh crisis came to Canada’s oil patch just as the sector was about to see the first annual growth in investments since the previous oil price collapse of 2014. 

The pandemic-driven downturn sent Canada’s deal-making to historically low levels in Q1 and Q2 this year, but M&A activity resurged in the third quarter, Evaluate Energy said in its latest M&A report this week. 

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More than US$900 million worth of upstream deals were announced in Canada in Q3—a figure that very nearly reaches the total of the three previous quarters combined, according to Evaluate Energy.  

“Canada’s recovery in the third quarter was mirrored by the wider oil market and global economy in that substantial recoveries have taken place since full lockdowns were lifted. It must be noted, however, that even with the huge Cenovus-Husky deal being agreed in early Q4, activity levels remain relatively muted in the Canadian market as a whole, compared to levels of M&A activity seen in years past,” Eoin Coyne, Senior Analyst at Evaluate Energy and report author, said

In Q3, deals in Canada involved some major companies. ConocoPhillips bought liquids-rich Montney acreage from Kelt Exploration for US$390 million. Canadian Natural Resources acquired for US$344 million Painted Pony Energy, whose production is heavily gas-weighted and is thus diversifying Canadian Natural’s heavily oil-weighted portfolio. In another transaction, Whitecap Resources bought NAL Resources from Manulife Financial Corp in an all-stock deal. 

The Cenovus-Husky deal is so far the highlight of M&As this quarter. 

“This could likely be the catalyst we need to set off a merger wave,” Veritas Investment Research analyst Jeffrey Craig told Financial Post after the transaction was announced. 

Another deal followed this week, and others are likely in the near future.

Just this week, Tourmaline Oil Corp announced two strategic corporate acquisitions, Modern Resources and Jupiter Resources, which will give the buyer an additional 76,000 boepd of current production, significant accretive cash flow, and free cash flow. 

“There will continue to be some consolidation here over the next year,” Tim McKay, President at Canadian Natural Resources, said on the earnings call this week, adding that “we probably are in a time of consolidation.” 

Another executive at a top Canadian oil firm, Suncor Energy’s president and CEO Mark Little, voiced the prevailing analyst opinion that buyers would only consider M&As if a deal brings significant value and synergies via top-quality assets. 

“With M&A starting to take off, I want to also be clear, we remain steadfast in our three criteria that must exist for M&A to occur: One, high-quality assets. And secondly, synergies that can be achieved by combining the assets to increase shareholder value; and thirdly, the transaction must be accretive for our shareholders,” Little said on the Q3 earnings call last week.  

“I can’t overstate it enough. We did not cut our capital budget, operating costs and reduce our dividend to leverage up our balance sheet to do M&A,” Suncor’s top executive said.   

By Tsvetana Paraskova for Oilprice.com

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