Oil’s Slump Puts Canada Aquistions Streak on Ice

The rapid decline in global oil prices is setting the stage for a long dance between buyers and sellers in Canada’s energy industry.
The rout put a chill on an oil and gas acquisition market that saw about $39 billion of deals this year and is leading sellers like Penn West Petroleum Ltd. (PWT) to consider waiting for a rebound. Highly indebted Canadian oil and natural gas producers may not be able to afford that luxury, and suiters such as Crescent Point Energy Corp. (CPG) Chief Executive Officer Scott Saxberg are circling for bargains.
“When oil was $100, there were companies that were struggling with their balance sheets and now oil is 60-some-odd dollars and they’re in trouble,” Saxberg said of the price for a barrel in an interview. “There will be a few of those companies that will disappear and have to be consolidated.”
Oil at a five-year low is making cash more scarce for producers that may have no choice but to sell assets or seek outright takeovers. The challenge will be finding investors willing and able to pay the price they want, Macquarie Group Ltd. (MQG) analyst Chris Feltin said.
“There’s going to be lots for sale and not a lot of buyers,” Feltin said by phone from Calgary. “Asset valuations might not be what the sellers would like to sell for but in this scenario there are few other options available.”

Most Vulnerable

Particularly vulnerable to the slump are producers that are highly levered and exposed to oil, Feltin said. He pointed to Talisman Energy Inc. (TLM), Penn West, MEG Energy Corp. (MEG), Baytex Energy Corp. (BTE), and Lightstream Resources Ltd. (LTS) as examples. They may consider asset sales as their capital expenditures and dividend payments exceed expected cash flows at current prices.
Repsol SA (REP), seeking acquisitions in North America amid the oil price plunge, has revived talks with Talisman that had broken down in August to buy assets or the entire company, people familiar with the matter said, asking not to be identified because the deliberations are private. The volatility in prices also means a deal may be more difficult to reach, the people said.
“The board would be willing to accept a lower take-out bid today than they would six months ago,” Michael Dunn, a Calgary-based analyst at FirstEnergy Capital Corp, said. “From that perspective, maybe the odds of a friendly bid are higher.”
Talisman, which hasn’t yet finalized its budget plans for next year, will lower its capital spending to manage what’s likely to be a “challenging environment” for the entire oil and gas industry, Brent Anderson, a spokesman, said in an e-mailed response to questions. He declined to comment on talks with Repsol.

Debt Ratios

MEG Energy’s net debt is about 22 times its cash flow, the highest ratio of 34 Canadian oil and gas producers worth more than C$1 billion ($874 million), data compiled by Bloomberg show. That compares with a median 1.6 ratio for the group. Talisman and Penn West have net debts of more than 2.3 times cash flow.
Brad Bellows, a spokesman for MEG Energy, said the company’s strategy allows it flexibility to respond to a variety of market conditions. The company said Dec. 4 it cut its 2014 budget by a third.
Penn West has already sold more than C$1 billion of assets as part of a November 2013 goal to raise C$1.5 billion to C$2 billion through deals.
“We have the flexibility to be patient through 2015 to maximize the value of any asset sales,” Greg Moffatt, a spokesman, said in an e-mail, adding that Penn West isn’t planning any sales next year.
Andrea Beblow, a spokeswoman for Baytex, declined to comment in an e-mail. A representative for Lightstream didn’t return calls for comment.

Price Slump

Benchmark crude prices have sunk more than 38 percent from June highs and an Organization of Petroleum Exporting Countries decision last month to sustain output amid a global glut worsened the chances for a recovery. West Texas Intermediate for January delivery dropped $2.79 to end at $63.05 a barrel on the New York Mercantile Exchange, the lowest settlement since July 16, 2009.
Oil and gas deals have amounted to 22 percent of about $174 billion in mergers and acquisitions involving Canadian companies so far this year, data compiled by Bloomberg show. That momentum has slowed amid the crude price volatility.

Project Postponed

The fourth quarter has already been lumpy, with just $4.1 billion worth of oil and gas deals announced so far. That compares with more than $10 billion in each of the previous three quarters.
The latest blow to Canada’s energy industry came from Petroliam Nasional Bhd. The Malaysian producer said Dec. 3 it’s deferring a decision on a liquefied natural gas project in British Columbia at a time when U.S. terminals are being built.
Producers developing the gas-rich Montney shale that straddles Alberta and British Columbia, such as Painted Pony Petroleum Ltd. and Crew Energy Inc., would stand to benefit from projects to ship LNG from Canada’s Pacific Coast.
For now, companies that were previously considering asset sales or putting themselves for sale will likely take a step back from the negotiating table until some stability returns, said Keith Chatwin, a partner at Stikeman Elliott LLP in Calgary who specializes in energy mergers and acquisitions. This is what happened the last time oil prices fell so dramatically in 2008, he said.

‘Pause Button’

“You’re going to see a lot of pause buttons being hit and people trying to get a feel for how low and for how long,” Chatwin said.
The deals that are currently well-advanced will likely still get done, Chatwin said, citing Bellatrix Exploration Ltd. (BXE)’s sale of a minority interest in its new deep-cut gas plant announced last week as an example.
Eventually, though, the stress will start to mount on companies whose operations are uneconomic at $70 a barrel and will kick off more asset sales, he said.
The price of crude will complicate Talisman’s plans to divest $2 billion in assets by mid-2015, FirstEnergy's Dunn said.
The company has several sales processes ongoing, including its Marcellus midstream assets, a stake in its Duvernay lands, as well as projects in Kurdistan and Papua New Guinea. The more advanced processes, like the Marcellus, will likely close, Dunn said. Finding adequate valuations on the remainder may prove more difficult amid the drop in crude prices, he said.
The company still expects one or two deals to be announced by year-end and is considering selling other properties, including those that consume capital and don’t produce much cash flow in the short to medium term, he said.

Biggest Opportunities

Not everyone believes the current drop in prices will spur a wave of mergers and acquisitions in the industry.
Eric Nuttall, a portfolio manager at Sprott Asset Management LP who oversees C$120 million in assets, said he expects oil prices to rally to “the mid-to-high $70s” next year -- maybe even higher. Just looking at producers’ net debt to cash flow to conclude they are imperiled is a “simplistic conclusion,” he said.
The biggest opportunities in the market are the companies that are being viewed as overly levered, said Nuttall, who’s adding to his position in Baytex and other producers.