The mergers and acquisitions (M&A) wave sweeping through the U.S. oil and gas industry has reached Canada, which could see a megamerger in the coming months.
Smaller deals are already taking place as 2023 saw an increase in the value of transactions in Canada's oil and gas sector.
Unlike in the United States, most Canadian firms are not in an urgent need to add future drilling inventory as the oil sands have years of crude yet to be produced.
The Groundwork for Canadian Oil & Gas Deals
The next M&A wave in Canada will consist of opportunistic - rather than necessary - deals, analysts say. And many of these would likely be focused on non-oil sands assets such as the Duvernay shale or Williston Basin. Likely buyers include U.S. firms seeking inventory at lower valuations compared to the top U.S. shale plays.
The Canadian industry can afford to be opportunistic - it has strengthened significantly balance sheets and paid down debts thanks to the higher oil prices of the past two years. The price of Canada's heavy crude from Alberta, Western Canada Select (WCS), relative to the U.S. benchmark WTI, is set to rise this year as the expanded Trans Mountain Pipeline from Alberta to British Columbia is set to begin operations next month. The higher takeaway capacity means that Alberta's oil producers will enjoy more pipeline capacity than they can fill, for the first time in nearly a decade.
Uptick in Canadian M&As
Canada has already seen in recent months several deals including Baytex Energy acquiring Ranger Oil Corporation for US$2.2 billion including debt, Crescent Point Energy buying Hammerhead Energy, and ConocoPhillips buying the remaining 50% interest in Surmont from TotalEnergies for approximately US$2.7 billion in cash. Related: UK Confident Its Energy Demand Will Be Met at All Times This Summer
The Canadian oil & gas industry saw 27 M&A deals announced in the fourth quarter of 2023, worth a total value of $4.2 billion, according to GlobalData's Deals Database.
In terms of value, M&A activity in Canada's oil and gas sector jumped by 20% in the fourth quarter compared with the previous quarter's total and soared by 95% as compared to Q4 2022.
The two biggest deals in Canada's oil and gas sector since 2022 took place in 2023-the ConocoPhillips acquisition of TotalEnergies' stake in Surmount and Pembina Pipeline's minority acquisition of Alliance Pipeline, Aux Sable Canada and NRGreen Power Limited Partnership.
In October, Tom Pavic, president of Sayer Energy Advisors, told The Canadian Press "I think you'll still see some more consolidation, for sure. I think there's still going to be some more transactions."
At the start of 2024, bankers and analysts continued to believe more energy deals are in the works in Canada.
Over the past year, there has been growing interest from U.S. companies to buy Canadian oil and gas assets, especially private U.S. firms, Brad Wells, head of energy at BMO Capital Markets, told Bloomberg in an interview this week.
While Canadian firms are in no need to add inventories, their healthy balance sheets could spur them to seek opportunistic deals that have the right economics and strategic rationale, Wells said, adding that because of the expected opportunistic nature, it is difficult to predict when the next big merger in Canada will be announced.
Still, a megadeal such as the ones being announced in the U.S. could happen in Canada, too, albeit with different rationale in mind, BMO's top energy banker told Bloomberg.
Last year, deal-making accelerated in all of North America as companies are looking to strategically position themselves for the future. Immediately after the 2020 crash in prices, many companies entered into deals because combinations helped both buyers and sellers to weather the low prices and demand. In 2023, with oil higher prices and profits from 2022 at record-highs, companies started thinking about their future inventory and geographical focus or diversification.
Stronger Canadian Industry
Things are looking up for Canada's oil and gas sector this year, which could lead to more mergers and not fire sales.
U.S. companies, including corporations and private equity firms, have shown growing interest in Canadian oil and gas players due to their lower valuations, high reserves, and increasing takeaway capacity, analysts and dealmakers told Reuters at the end of last year.
Amid high prices and fierce competition for assets in the Permian, Canadian non-oil sands resources could attract more buyers from the U.S. in the coming months.
Canada's oil will have increased access to markets soon, which is set to raise WCS prices as more capacity on the Trans Mountain Expansion (TMX) pipeline would narrow the discount to the U.S. benchmark.
Global crude oil prices should remain relatively stable in 2024, but prices for Canadian producers are expected to rise once the TMX pipeline starts operating, Deloitte Canada said last week.
WCS prices will increase as the differential with West Texas Intermediate narrows when the TMX begins calling on Canadian producers for line fill, said Andrew Botterill, national Oil, Gas & Chemicals leader at Deloitte Canada.
"There's some optimism in the Canadian oil and gas sector this year, but that doesn't mean there won't be some volatility as the system adapts to its new capacity," Botterill noted.
By Tsvetana Paraskova for Oilprice.com
Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. More