Even with the drop in oil prices, 2014 was a reasonably robust year for transactions in both the oil and gas industries. “Both commodities, oil and gas, had a decent run through 2014,” explains Clinton Roberts, PwC’s Alberta Deals Leader. “There was renewed optimism in gas and, while oil was pretty consistent ...through the summer, and even into the fall, we were seeing good deal flow.”
Gas outlook is Moderately Optimistic
On the gas front, the deals forecast is relatively stable, except when it comes to liquid natural gas (LNG). “The pace of liquid natural gas (LNG) deals is slowing in Canada,” says Roberts. And with no final investment decision (FID) on LNG in Canada, increasing international supply and decreasing demand, Canada is not likely to be seen as a significant LNG market in the short-to-medium term. As a result, “The M&A that came from investors trying to pick up LNG reserves has slowed,” says Roberts. “We expect to see that trend continue through 2015.”
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But traditional natural gas should be more stable than the last few years, from a deals perspective, despite the recent decline in prices. “The current price is $2.62. But, if you look at the average price for the past year,” Roberts explains, “It has been above the average production cost in Western Canada.”
The weakening Canadian dollar has somewhat buffered the impact of price reductions, both for natural gas producers, and for producers the oil industry - where market prices have plummeted far more dramatically. “The majority of contracts involve US dollar based revenue and Canadian dollar based expenses,” says Dave Planques, National Leader of PwC’s Corporate Advisory and Restructuring practice. “So the industry is definitely benefiting from the lower Canadian dollar.”
In late December, Spain-based Repsol SA acquired Talisman Energy Inc., making it Canada’s biggest deal for 2014. After a drawn out sales process and multiple rounds of offers and negotiations, Repsol and Talisman agreed on a purchase price. This price may be lower than what some would have expected in the summer, however, given the current price environment, it’s anticipated the shareholders will approve the deal at a vote in late February.
Oil price plunge likely to result in both distressed and strategic M&A
Oil prices may have plunged, but the impact on deals in the oil patch will be a lot different than when prices plummeted in 2009. “In ‘o9, we had a global crisis and no one was certain about what was going to happen,” describes Roberts. “Everything just stopped. Restructuring didn’t happen. Deals didn’t happen.”
The current decline in prices is occurring in a vastly different economic environment. Oil prices might be down, but the rest of the North American economy is doing quite well. Even within the oil industry, there are positives. “The volume of oil exports is in good shape,” says Roberts. “In fact, in December 2014, we had a record month of oil exports from Canada. The highest monthly volume ever.”
Looking ahead, forward price curves suggest oil prices will remain under $60 a barrel into December 2015, with a $15 differential on average for Western Canada Select (WCS). “This is going to create a number of distressed deals, primarily in oilfield services,” suggests Roberts. “There will be a handful of exploration and production (E&P) companies that you will see transactions on as well.”
Deals will come from two sides. “First you will have healthy companies that run out of capital and need new capital to keep producing, exploring and developing,” says Planques. “And then you will see some companies running into debt covenant and servicing issues, being forced into transactions.”
Despite the current price of oil, there is a considerable amount of interest in western Canada for deals, – from private equity and corporate investors, both domestic and international. As a result, there’s likely to be consolidation in both oilfield services and E&P. “Many of these will be strategic buys, but there will be some forced distressed sales,” says Planques.
The winners are likely to be investors with deep pockets who are willing to take a long-term view. “People who will look at western Canada and say we’ve had an average cost of production of $65,” describes Roberts.