Domestic oil and natural gas producers are behind the best annual start in at least a decade for Canadian energy deals as companies such as Canadian Natural Resources Ltd. (CNQ) fill a void left by state-owned firms.
Announced oil and gas deals involving Canadian companies amount to $6.4 billion this year, according to data compiled by Bloomberg. Deals slumped to just $634.3 million over the first two months of last year after rising in 2012 when China’s Cnooc Ltd. (883) announced its $15.1 billion purchase of Nexen Inc.
Mergers are rebounding because the pull-back by Asian state-owned firms has made assets more affordable, while gains in Canadian energy stocks have given domestic buyers more confidence to make deals.
“The difference today is we are seeing the ability of the Canadian producers to compete, which wasn’t the case a year ago,” said Nicholas Johnson, managing director of corporate finance at FirstEnergy Capital Corp., a Calgary-based investment bank. He called deal sentiment “optimistic” in Canada. “We’re also continuing to see private equity active,” he said.
National oil companies began focusing on lifting profits over making more acquisitions just as Canadian Prime Minister Stephen Harper vowed in 2012 to block further sales of oil-sands assets to state-owned firms after approving the Nexen deal. The reduction of investment by state-owned companies helped push deal activity to the lowest in a decade in 2013, Bloomberg data show.
Meanwhile, acquisitions are becoming cheaper for the largest Canadian energy companies as optimism returns to the industry, buoying stocks. Canada’s S&P/TSX Energy Index, made up of the nation’s largest energy companies, has gained 3.5 percent this year, compared with a decline of 2.5 percent on the S&P 500 Energy Index in the U.S.
As trains carry more crude, pipeline bottlenecks are easing, boosting spot prices for Canada’s heavy oil 52 percent from a November low. Calgary-based gas producers are also gaining on a price surge for the heating fuel, which hit a five-year high in New York last week as winter storms swept the continent.
“It seems as if there’s movement on the infrastructure story and the commodity price is hanging on, giving people optimism,” said John Stephenson, a portfolio manager at First Asset Investment Management Inc. in Toronto. “You’ve had this go-nowhere deal flow and now that logjam is being broken.”
Two deals this month are sparking optimism among bankers and analysts for additional takeovers in Canada’s energy industry this year. Canadian Natural agreed to pay C$3.13 billion ($2.8 billion) for Devon Energy Corp. (DVN)’s mostly gas-producing conventional assets in Canada, and Baytex Energy Corp. (BTE) agreed to buy Australian producer Aurora Oil & Gas Ltd. for C$1.8 billion to gain light oil output in the Eagle Ford shale formation of Texas.
Canadian Natural and Baytex would have previously been outbid by national oil companies, or NOCs, said Chris Cox, an analyst at Raymond James Ltd. in Calgary. Devon’s assets fit better with China Petrochemical Corp.’s Canadian unit and the Eagle Ford has been the playground of national oil companies, he said.
“The fact that they weren’t able to come in suggests that NOC buyers are really sitting on the sidelines in standstill at the moment,” Cox said.
The Canadian Natural acquisition shows there are “very savvy” buyers in Canada “even of a scale that we have not seen for a number of years,” Robert Pare, an analyst at Clarus Securities Inc. in Calgary, said in an e-mail.
Tourmaline Oil Corp., Kelt Exploration Ltd., Crescent Point Energy Corp. and Whitecap Resources Inc. are some of the “names that have the ability to create significant shareholder value from acquisitions,” Pare said. Suncor Energy Inc. may be a buyer in the oil sands, he said.
“We are definitely looking at assets,” Kelt Exploration CEO David Wilson said by phone yesterday. “We have made acquisitions and will make some more.”
Whitecap CEO Grant Fagerheim didn’t respond to requests for comment, nor did Crescent Point spokesman Trent Stangl or Scott Kirker, general counsel at Tourmaline.
Private-equity buyers may also look to step into the void left by national oil companies. New York-based KKR & Co. is opening a Calgary office, following its C$250 million investment in Calgary-based Torq Energy Logistics Ltd. in December.
“Yes, we are looking at opportunities,” Kristi Huller, a KKR spokeswoman, said via e-mail yesterday.
Encana Corp. (ECA), the largest Canadian gas producer, is betting on interest from private-equity firms as it tests the market for asset sales, according to CEO Doug Suttles. Encana hired Royal Bank of Canada to sell its Bighorn properties in Alberta, people familiar with the process said. The assets may attract bids of C$2 billion to C$4 billion, according to Cormark Securities Inc.
“Probably the biggest shift is that there is a lot of private equity focus in the industry right now,” Suttles said in a Feb. 13 interview. “I’m sure they would be interested in some of the assets we have.”
The Encana properties are among a glut of energy assets producing the equivalent of about 300,000 barrels of oil a day that are publicly or privately for sale, said Sandy Edmonstone, executive director of oil and gas at Macquarie Group Ltd.’s investment-banking division in Calgary.
While “cautiously optimistic” for a better year for deals than 2013, higher oil and gas prices may cause sellers to hold out for bigger offers, Edmonstone said. “As commodity prices go up, expectations go up and there’s always this gap,” he said.
The purchases by Canadian Natural and Baytex show “transactions are getting done and valuations are reasonable,” said Stephenson at First Asset. “It may be too early to ring the bell and say the salad days are back but it’s definitely encouraging.”