Canadian Oil and Gas M&A Up, Keeping Pace with Global Sector Trends

- June 26th, 2018

In May, upstream sector divestments reached C$4.5 billion, the highest since March 2017. Part of the sector growth came as a result of Vermillion Energy finalizing its C$1.4 billion acquisition of Spartan Energy.

The first half of 2018 has been especially fruitful for the oil and gas sector, as mergers and acquisitions (M&A) have helped major players consolidate their viable projects and finances.

Canada in particular has benefited from the pro M&A environment. In May, upstream sector divestments reached C$4.5 billion, the highest since March 2017. Part of the sector growth came as a result of Vermillion Energy (TSX:VET) finalizing its C$1.4 billion acquisition of Spartan Energy (TSX:SPE). The merger added an additional 23,000 barrels of oil equivalent per day (boe/d) to Vermillion’s portfolio.

When asked about the deal ahead of the May acquisition, Vermillion CEO Tony Marino said that his company was especially interested in energy assets that were ‘unloved’ with low valuations.

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“The Canadian sector continued to be more and more unloved over time, especially in the past year in the capital markets, and with our evaluation methodology and criteria we had, we found it came to represent better and better value,” he said.

“Spartan is probably the best example of this out there in that you have a company that is quite capable of rapid production growth.”

Also in May, Royal Dutch Shell (LSE:RDSA) decided to shed its 7.98-percent stake in Canadian Natural Resources (TSX:CNQ) for C$4.2 billion. The move is part of an ongoing effort by the oil and gas giant to consolidate projects and reduce debt. Since 2015, Shell has sold off more than US$34 billion in assets and business units.

These two most recent Canadian M&A are representative of a larger global trend throughout the sector. At the beginning of June, EY released its eighth oil and gas capital confidence barometer, citing 90 percent of oil and gas executives expect the global M&A market to improve over the next 12 months.

“An improving macro environment evidenced by indicators, such as oil price stabilization and continued growth in demand, along with economic discipline by OPEC and non-OPEC members, has raised confidence in oil and gas executives over the past six months, according to the latest edition of the Capital Confidence Barometer,” Andy Brogan, EY global oil and gas transactions leader noted.

In terms of large international deals, Canadian companies are also raising the stakes. Calgary-based Suncor Energy (TSX:SU) completed a US$68 million deal in Norway to gain an interest in the Fenje development project.

Husky Energy (TSX:HSE) also signed two new production sharing contracts with CNOOC (TSX:CNU)  to add to its South China Sea portfolio.

The series of deals reflect an optimistic outlook that is sector-wide, according to the EY report.

“More than 44 percent of the oil and gas company respondents believe the global economic situation is improving, up from 27 percent in October 2012,” states the report. “There has also been a decrease in the number of companies who report declining sentiment, from 23 percent to 17 percent.

As Q2, draws to a close it will be interesting to see the reported profits and future acquisitions the oil and gas sector has coming down the pipeline.

Brent crude was up 1.49 points on Tuesday (June 26), sitting at US$76.04 a barrel midday.

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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.

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