The short take on energy trends in the last two quarters is “what a difference a Polar Vortex can make”. That weather phenomenon is partly responsible for a change in the current and the predicted future prices of natural gas. The winter heating season ended with significantly lower quantities of gas in storage than usual. As well, the demand for gas continues to escalate with gas continuing to replace coal as a power generation fuel.
That and other factors contributed to a strong revival of M&A and financings in the sector. Much of that activity was focused on natural gas properties. The dollar value of deals done to date has already passed last year’s record low levels of activity.
Q1 saw the CNRL purchase of Devon’s Canadian conventional properties (C$3.13B), Baytex’s purchase of Aurora (C$2.6B), Whitecap’s purchase of properties from Imperial Oil (C$855M), Tourmaline’s purchase of Santonia (formerly Fairbourne) (C$189M), IOC’s purchase of 10% of Petronas’ BC gas reserves, and other transactions.
Notable deals in Q2 include CNRL’s purchase of gas properties from Apache (US$375M), Osum’s recent purchase of the Orion oil sands project from Shell (C$325M) and Surge’s agreement to acquire Longview (C$429M).
Activity in the oil sands remained slow, however. Athabasca Oil exercised the right to put its interests in the Dover Project to PetroChina. But, there was not much other activity. In particular, there has not been much activity involving Asian entities. Most think the reasons for that include the new Investment Canada restrictions on SOE purchases. In addition, the escalating cost of developing oil sands projects is chilling prospects. That caused Suncor and Total to cancel projects and upgraders in the first half of 2014 and was a factor in other oil sands producers’ struggles this year, including Sunshine Oil Sands and Southern Pacific Resources. In short, oil sands activity seems to be challenged.
The slowdown in the progression of proposed oil sands projects may also reflect skepticism that export pipelines will be built. Opponents of those pipeline projects have had remarkable success. Keystone, Northern Gateway, the TransMountain Expansion and Energy East all seem to be facing effective opposition. The recent environmental programs announced by the White House don’t sound good for Keystone. And while the June 17 approval of Northern Gateway by the federal government is a step in the right direction, there are still significant challenges to overcome. The federal government’s history of public support for that project could backfire on it if the courts conclude that its bias made the First Nations’ consultation process disingenuous or wanting.
Prairie Sky was a bigger success than Encana expected. As we predicted in our 2014 Energy M&A Trends post, other producers with these kinds of freehold oil and gas properties are actively considering IPOs of this nature. The Globe’s Report on Business recently published a story confirming that CNRL is looking into a Prairie Sky type of offering. CNRL estimates that market value of its royalty generating properties is in excess of C$3B.