A recent report by the Royal Bank of Canada reveals that lower oil prices may result in cuts to business investment in the oil and gas industry which may have a chilling effect on the M&A activity in this Canada’s important sector of economy.
Oil prices started to decline in June 2014. In the last six months, WTI crude benchmark had fallen from above US$100 to below US$50 a barrel; a drop of more than 50%. While historically OPEC would support the falling oil price, this time it refused to do so trying to preserve its market share by putting pressure on the competitors producing oil from US shale deposits, the Alberta oil sands and offshore projects.
RBC warned that reductions to oil-production investment are “more certain to occur” than the positive, counteracting forces of lower-priced crude. It is, therefore, expected that for deals involving oil and gas assets there will be a pause in M&A activity that will continue through at least the first part of 2015. During this pause buyers will wait to see if prices keep falling before committing to acquisitions, while sellers will try to avoid selling at the bottom of the cycle.
There are certainly players looking to invest their money in the sector. For example, AltaGas has recently announced that it plans to double its asset base over the next five years. Likewise, in December, Veresen announced the formation of Veresen Midstream with KKR and a $5 billion midstream expansion for Encana and Mitsubishi.
Overall, the RBC report said lower oil prices will have significant (negative) impacts on budgets in oil-producing provinces. But it argues these provinces—Alberta, Saskatchewan and Newfoundland and Labrador—have seen big increases in revenues from price increases in recent years, putting them on relatively strong footing to absorb the shocks of a prolonged decline. Other provinces, meanwhile, are seeing benefits from the low crude prices in the form of cheap gasoline and the falling Canadian dollar, which is creating a better climate for their manufacturers and exporters.
The RBC analysis pointed to a combined effect of three “offsetting positive outcomes” from low-priced oil: a boost for the US economy; the lower Canadian dollar’s benefit to exporters selling to the stronger US market; and more spending by Canadians thanks to cheaper fuel.