Small Canadian upstream companies have become a prime target for corporate investors, according to a recent IHS study.
Driven by buyers with a desire to secure lucrative, oil-weighted assets in prime plays and sellers seeking to optimize profitability and generate cash-flow to fund new investments, corporate upstream merger and acquisition (M&A) transactions for small Canadian exploration and production (E&P) companies have increased significantly during the first part of 2014, as compared to the same period in 2013, according to the information and insight provider.
Since the beginning of 2014, seven corporate E&P transactions, each exceeding $10 million USD in deal value, have been announced in Canada, and total corporate transaction values have exceeded $2.5 billion so far this year after plunging to a 10-year low of approximately $2 billion in 2013. This compares with 11 total corporate E&P transactions for 2013, according to IHS data.
“The Canadian marketplace for E&P companies holding high-quality unconventional and light-oil opportunities is red hot, and buyers targeting these oil-weighted companies can expect to pay twice as much on a proved-reserves basis compared with companies pursuing takeovers of Canadian gas-weighted firms,” said Anna Wuchek, principal analyst at IHS Energy and principal author of the report, “IHS Herold M&A Alert-Upstream: Corporate Consolidations Among Small Canadian E&Ps Rising.”
Based on annual figures as of May 31, Wuchek added that the Canadian M&A market is on pace for more than 15 corporate acquisitions with a total estimated corporate deal value of more than $6 billion for the full year.
“We at IHS do expect the Canadian small E&P consolidation trend to continue in 2014, and while Canada is on pace to reverse the decline we still expect the deal count to be below the 15-year average of approximately 35 corporate transactions,” she said.
As recently published in its “IHS Herold 2014 Global Upstream M&A Review,” Wuchek also noted that unconventional and light-oil opportunities such as the Cardium and Viking plays continue to offer the best opportunities for buyers looking to acquire high-quality Canadian oil assets, and consolidation in Canadian unconventional resource plays should increase as these plays mature.
“There could be significant consolidation in the small-to-midsize Canadian companies holding substantial acreage in the Duvernay shale play in Alberta,” she said. “We could also see more consolidation of conventional, natural gas-weighted junior E&Ps with depressed market valuations, which would offer unconventional opportunities and operational synergies.”
IHS has seen such a trend in the recent acquisition of Alberta gas producer Santonia Energy by Tourmaline Oil for $187.4 million CAD in an all-stock transaction, which closed in April.
“E&P companies that have excelled will be motivated to use their well-performing stock as currency to acquire conventional, natural gas-weighted junior E&Ps with depressed market valuations,” Wuchek said. “Doing so will enable them to achieve prime acreage consolidation in unconventional opportunities and to achieve cost reduction and operational synergies through infrastructure optimization.”
While a majority of the corporate consolidation is led by Canadian E&Ps, Wuchek noted that in 2013 and 2014 the industry has witnessed the entrance of new international firms into the Canadian corporate space, namely Chinese and Polish buyers.
In a transaction announced in September 2013, Hong Kong-based Yanchang Petroleum International Ltd. agreed to acquire Canadian E&P Novus Energy Inc. in a cash transaction valued at $327.4 million CAD. The deal, which closed in January, targeted primarily light-oil resource plays in the Viking and Cardium plays in Alberta and Saskatchewan.
Also in September 2013, Orlen Upstream, a subsidiary of Poland-based PKN Orlen S.A., agreed to acquire Canadian E&P TriOil Resources Ltd. for a total transaction value of $252.3 million CAD. TriOil’s primary assets were mainly unconventional resource plays in Alberta. The transaction marked the company’s entry into the North American E&P market, giving it an opportunity to gain expertise that could be used in its shale gas exploration in Poland.
TriOil Resources announced a second Canada corporate takeover this year — this time without disclosing the purchase price. The company agreed to acquire privately held Birchill Exploration LP, which operates oil and gas fields in the Ferrier/Strachan area of Alberta near TriOil’s existing fields.