Edmonton Journal – More appetite and opportunity for energy deals in 2014

EDMONTON – Look for oilpatch dealmakers to pick up the pace of activity in 2014.

That’s the word from Barry Munro, who heads Ernst & Young’s Canadian oil and gas advisory group.

After a fairly sluggish 2013 — when the total value of energy transactions globally fell 21 per cent to $337 billion US, and plunged 77 per cent to just $12.8 billion in Canada — Munro expects a busier year ahead.

The key drivers are more asset sales as producers hive off non-core properties, stronger netbacks due to a softer loonie and higher natural gas prices, better access to capital for junior players and a brighter outlook for domestic oil producers as more crude moves by rail and pipeline obstacles get resolved.

“We’ve been kind of surprised by some of the announcements out of the majors over the past two or three weeks, saying 2013 was far more challenging than they thought. Royal Dutch Shell is a good example,” says Munro, noting the energy giant’s recent profit warning and sharp drop in annual earnings.

“So I think the portfolio rationalization issue has started to take hold. Companies are thinking about where they deploy capital, whether they have capital to make acquisitions, or whether they should focus on cleaning up their portfolio and focusing on fewer plays.”

Several major producers in Western Canada — including Encana, Suncor, Imperial Oil, Talisman, Devon Energy, Korea National Oil Corp. and Penn West Petroleum — announced or completed the sale of large asset packages last year, and Munro expects that trend to continue.

“People came out of 2012 when there was lots of transaction activity (including the blockbuster $15.1 billion purchase of Nexen by China National Offshore Oil Corp. and the $5.8 billion Cdn acquisition of Progress Energy by Malaysia’s Petronas) and then we hit a pause in 2013,” he says. “People worried about stretching their balance sheets and how much debt they were taking on. More fundamentally, they worried about whether they had the right assets or if they were spending money on the right assets.”

Weak natural gas prices and periodically fat discounts on landlocked bitumen and heavy oil from Western Canada also soured the industry’s mood, as did the lack of clarity from Ottawa on the takeover rules for foreign state-owned enterprises.

“Now, as I look forward to 2014, I believe the capital agenda is what drives the thinking among oil and gas executives and boards, regardless of company size. So I see more portfolio rationalization and more transaction activity than in 2013. Markets work best when there are active buyers and I think there does appear to be some renewed life and interest in the Canadian capital markets for oil and gas companies.”

Aroon Sequeira, president of Edmonton-based Sequeira Partners — which provides merger and acquisition advisory services to small and mid-size energy services and industrial companies — is also bullish on 2014.

“One big transaction can skew the numbers quite a bit. But barring that I would say we’ll see deal activity levels increase by 10 to 20 per cent over last year.”

Although the mid-market sector saw 128 deals completed in 2013, the same as the previous year, the total value of those deals slid more than 40 per cent, to $2.95 billion Cdn from $5.3 billion. That’s because the 2012 total was boosted by three large deals, however.

The biggies included San Francisco-based URS Corp.’s $1.25 billion purchase of Calgary’s Flint Energy, Pittsburgh-based WESCO International’s $1.14 billion purchase of Calgary’s EECOL Electric Corp. and Calgary-based Gibson Energy’s $445 million US purchase of Louisiana’s OMNI Energy.

“If you turn the clock back to the latter part of 2012 or early 2013, it was a challenging environment for the services sector,” says Sequeira, citing weak commodity prices that curtailed drilling and oilfield service work, and pipeline bottlenecks that spread gloom over the oilpatch.

“But in the latter half of 2013 the wind seemed to come back into the industry’s sails, and in early 2014 we’re feeling that same momentum in terms of economic conditions and activity levels in energy services. The forecasts for industry capital spending are slightly up, and pockets like the Duvernay and the Montney we expect will remain active. In the oilsands, capital spending is also expected to be up slightly from last year, so we expect that to continue.”

Sequeira also expects at least a couple of multibillion dollar liquefied natural gas projects to proceed in Kitimat. To pursue potential deals among would-be suppliers to that burgeoning industry, Sequeira Partners has opened an office in Vancouver.

“I think the problem is that there isn’t a well-developed core of mid-market companies that have been operating there for many years and are ready to be picked off. I would liken it to what Fort McMurray was like in the ‘70s or ‘80s.”