In 2019, large-scale Canadian oil and gas deal flow declined sharply compared to previous years.
Canada’s continued challenging capital market situation, compounded by pipeline takeaway capacity constraints, uncertainty on differentials and general negative sentiment surrounding oil and gas investment, led to further divestitures and go-private transactions.
Perhaps in response to the lack of capital available in the upstream, or to the growing valuation gap between upstream assets compared with midstream and infrastructure assets, we also saw an uptick in midstream and infrastructure monetization and spin-out transactions. We continued to see the trend of general consolidations, and insolvencies and workouts, arising from poor prices and over-leverage.
On the positive side, LNG project owners were acquisitive of natural gas assets to meet feedstock requirements. Given that LNG Canada took positive FID in September 2018, it is possible that a trend of LNG project owners acquiring upstream assets to meet throughput requirements might be occurring. Last year there were continued steps taken toward other LNG projects, including Pieridae LNG and Woodfibre LNG.
There was some light at the end of the tunnel, as a small number of previously successful energy teams relaunched new companies to well-received financings. Some industry observers compare this time in the energy business to 1997-98, when oil prices were low and high-quality assets were traded at bargain-basement prices. If producers can be patient, say these observers, they will be able to assemble quality assets cheaply.
Below is a summary of our top transactions and trends for 2019:
1. Devon exits – continuing international divestitures from Canada
Continuing with the multi-year trend of international oil companies divesting from Canada, Canadian Natural Resources Limited (CNRL) acquired all of Devon Canada’s assets for $3.75 billion, including the ~110,000 barrel/day Jackfish oil sands project. This was one of 2019’s largest corporate M&A deals, and follows on CNRL’s 2018 acquisition of Shell’s Athabasca Oil Sands Project.
2. Encana moves to Denver - chasing passive capital
Encana, an upstream producer with historically deep roots in Canada (its foundation is the mineral rights owned by the Canadian Pacific Railway), announced its intention to redomicile in the United States and change its name to Ovintiv. Chief Executive Officer Doug Suttles provided the following background for the move: “A domicile in the United States will expose our Company to increasingly larger pools of investment in U.S. index funds and passively managed accounts, as well as better align us with our U.S. peers.”
Encana is notably one of the only non-oil sands large-cap energy companies (enterprise value > C$10B) operating in Canada. Encana’s departure further thins out the roster of large TSX-listed Canadian oil and gas companies, and its de-listing from the TSX will have a measureable impact on the calculation of the TSX/S&P index.
3. LNG feedstock transactions: Pacific Oil and Gas acquires Canbriam Energy and Pieridae Energy acquires Shell Canada’s Foothills Assets
Pacific Oil and Gas, a privately-held Indonesian company, acquired Canbriam Energy, a Warburg-backed, liquids-rich gas producer, for a reported $900 million. Pacific owns the Woodfibre LNG project located in Squamish, B.C. Pieridae Energy, the proponent of the Goldboro LNG liquefaction project in Saint John, N.B., and a recent serial natural gas acquirer, acquired $190 million of southern Alberta natural gas production and infrastructure from Shell Canada.
These transactions highlight the increasing importance of LNG feedstock for liquefaction projects that have been commissioned by project proponents without throughput gas to support offtake obligations. As prices for gas assets have tumbled, LNG project proponents have been able to acquire upstream reserves for current low valuations – taking advantage of the fact that production may not be required until the LNG project is up and running. This business plan requires patience and enough working capital to finance the acquisition without having to service debt from the newly acquired production.
4. Cona Resources’ acquisition of Pengrowth Energy – private bets on heavy oil
In November, 2019, Cona Resources, a portfolio investment of Adam Waterous’ Energy Fund, announced the proposed go-private acquisition of Pengrowth Energy in a corporate deal for approximately $740 million. The Pengrowth acquisition will add to Waterous’ already hefty bet on Canadian heavy oil assets, adding Pengrowth’s Lindberg SAGD project to the Northern Blizzard Lloydminster assets acquired in 2018. The transaction was precedent setting in that the equity consideration offered, $0.05/share, was considerably lower than the trading value of the shares immediately prior to the announcement, being $0.20 each, and that senior lenders purportedly took a small haircut on their debt.
5. Continued consolidation
On January 4, 2019, Blackbird Energy and Pipestone Oil Corp., adjacent Montney operators, combined into one entity under a plan of arrangement. The transaction is just one example of the continued wave of consolidations as issuers try to find synergies in operations and capital by joining together. In 2014, the TSX and TSXV together supported approximately 350 energy issuers. This number dropped to 180 in 2019. We believe this trend will continue absent any material improvement in capital markets in the energy sector, given the inability of upstream producers to raise capital in the public markets.
6. Decoupling and pure-play transactions: NorthRiver Midstream and tourmaline/ topaz
We saw a continuation of the trend of pure play spin-outs in a market where issuers with a varied assets mix achieve lower valuations than those focused on a core line of business. Major transactions included:
- NorthRiver Midstream’s acquisition of Enbridge’s Canadian midstream business for a total consideration of $4.3 billion. Enbridge representatives indicated that the move “advances [Enbridge’s] strategic priority of moving to a pure play regulated pipeline and utility business model.”
- Tourmaline Oil’s spin-out of private royalties and infrastructure into Topaz Energy, for cash and share consideration of an aggregate of $775 million.
- Crescent Point’s sale of its associated gas infrastructure assets in Saskatchewan to Steel Reef Infrastructure for $500 million.
- Athabasca Oil’s sale of its Leismer oil sands infrastructure assets to Enbridge for $265 million.
With increasingly lower multiples being achieved by upstream companies, and the increasing gaps in premiums being paid on midstream, infrastructure and even royalty assets, we anticipate more spin-out and monetization transactions as issuers try to achieve higher separate valuations for these assets and/or obtain cash to deleverage or pay for core operations.
7. Successful fundraising by veteran teams
It was not all doom and gloom in 2019. A few veteran companies/teams and funds did manage to raise equity capital. In the private space, ARC Financial successfully launched its Fund 9, Pat Carlson restarted with Kiwetinohk Resources, and Allied raised funds to acquire certain Crescent Point assets. In the public space, we saw the ex-Spartan team restart with a recapitalization of Return Energy, and the ex-Raging River team restart with the recapitalization of Corridor Resources.