Billion-dollar deals prove frozen energy patch is thawing

Share

You can't call it a flood of deal flow. But the energy patch is certainly thawing.

After an rather barren 2013, the recent string of billion-dollar energy deals involving Canadian companies has people thinking that oil and gas players can finally be hopeful about buying and selling assets.

In November, Talisman Energy Inc. announced plans to unload a big chunk of its Montney assets for $1.5-billion; two weeks ago Baytex Energy Corp. unveiled plans to buy Aurora Oil & Gas Ltd. for $1.8-billion; and on Wednesday Canadian Natural Resources Ltd. disclosed plans to buy some of Devon Energy Corp.'s Canadian natural gas assets for $3.1-billion.

What gives? There's been some "market therapy," said Adam Waterous, global head of investment banking at Scotia Capital. "Both buyers and sellers have gone for a ride on the learning curve."

Even though energy companies have been desperately trying to unload assets for what feels like eons, few deals ever got inked. For the longest time, buyers and sellers weren't seeing eye to eye on price.

The gulf between them is now starting to close.

After reaching some stalemates, when neither buyers nor sellers would budge on price, both sides are starting to reset their expectations. As simple as it sounds, Mr. Waterous said, sometimes a "cure for low deal activity – is low deal activity." He has a good vantage point: His team advised on all three of the recent billion-dollar energy deals.

But it's still too early to declare this a watershed moment. Other investment bankers in Calgary say it's still tough out there – even though they acknowledge that it's getting easier to get a deal done.

Each deal comes with its own nuances, and these differences can make it harder or easier to reach an agreement. In the latest acquisition, both companies had good reason to ink the deal. Investment-grade CNRL was easily able to obtain a $1-billion credit line from Bank of Montreal, allowing the company to put in a cash bid for good assets. The deal also gives CNRL some royalty options.

Devon, meanwhile, has been struggling a bit since its $6-billion (U.S.) cash acquisition of GeoSouthern Energy's assets in the Eagle Ford oil play in November, so this deal quickly gets some cash in the door.

When the motivations don't line up, however, deal making can be more difficult. And some of the historical buyers just aren't around any more. Many global energy companies are still suffering from big writedowns and aggressive capital spending. Just last month BG Group wrote off an additional $1.1-billion on its U.S. shale gas properties.

Beyond that, sometimes the assets up for sale just aren't that lucrative. Talisman Energy Inc., for one, has been trying to scale back its operations, but it just can't find many buyers, especially for its North Sea assets.