Analysts expect M&A revival in Canada

Despite problems created for Canadian producers by the plunge in crude oil prices, mergers and acquisitions will revive this year, according to analysts at EY Canada, Calgary.

Transaction activity plummeted last year, which Partner Barry Munro and Vice-Pres. Chris Hibberd describe in a new report as “a difficult and turbulent time as traditional energy business models were forced to transform to survive in a new resource-abundant world.”

Divergent price expectations of buyers and sellers coupled with “patient capital providers” kept many transactions from advancing in 2015, according to the analysts.

This year, however, “the dynamics of a very robust transaction period appear to be coming into place.”

Canada retains world-class, underdeveloped energy resources and remains politically stable, Munroe and Hibberd point out.

Furthermore, operators have slashed costs so much that the analysts expect Canadian projects to remain competitive with US counterparts on a break-even cost comparison.

Capital is plentiful globally, and a decline in the Canadian dollar makes Canadian assets appealing to US and other international buyers.

And Canadian energy companies, the analysts say, are “highly resilient and innovative,” able to adopt “new models and structures to succeed in our new era of energy abundance.”

Accelerating activity

According to Munro and Hibberd, M&A transaction activity will accelerate in 2016 because:

• “Companies have to take action.” Under severe liquidity, some companies will be forced by lenders, shareholders, activists, or managers to make deals.

“There is opportunity for the strong.” Companies with healthy balance sheets and stable operations will be drawn to attractive assets available at depressed prices.

“Of innovative access to capital.” Last year, “capital structure innovators” expanded their presence to take advantage of illiquid capital markets. Some of the largest transactions last year, for example, involved acquisitions by investment firms of royalty interests from producers. “While the size of future royalty transactions may vary, manufactured royalty deals will likely continue,” the analysts say. Munro and Hibberd also expect an increase in midstream deals this year.

“Synergies will matter.” Oil-field service providers will remain under pressure to reduce costs and will need synergies available through consolidation and rationalization.

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