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Canada’s oil-patch deal flow picks up in 2017

Pumpjacks at work pumping crude oil near Halkirk, Alta.

Larry MacDougal/THE CANADIAN PRESS

Blockbuster deals in Canada's oil patch unveiled in the first quarter have kept energy bankers, lawyers and investors busy.

A tepid outlook for crude prices after a lengthy downturn has sparked a wave of consolidation in the oil sands, as major domestic producers scramble to lower costs in one of the world's priciest exploration zones. Thomson Reuters's quarterly ranking of Canadian deal-making by investment banks and law firms shows that foreign dealers, led by JPMorgan Chase & Co., have played leading roles in these energy transactions.

In addition to the bragging rights for topping the quarterly contest among banks, these dealers generate handsome fees for providing advice to clients and underwriting the bond and stock sales that pay for them.

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Cenovus Energy Inc. and Canadian Natural Resources Ltd. are adding heft to their portfolios in the hopes of lowering costs, buying assets from global energy companies eager to reduce debt while shifting their focus to regions that offer better returns more quickly. Both deals, which were announced last month, involve shares as part of payment for the assets, meaning sellers ConocoPhillips Co. and Royal Dutch Shell PLC will maintain a more liquid toehold in the sector that they can sell over time.

"While there is an appetite to sell some of the Canadian assets from the global majors, they may want to maintain a position to benefit from higher oil prices," said David Rawlings, senior country officer for Canada at JPMorgan. "If they wake up in the future and want to sell, it's a very easy process."

JPMorgan acted as one of multiple advisers to Cenovus and Shell, as well as to AltaGas Ltd. in its roughly $4.5-billion (U.S.) acquisition of WGL Holdings Inc. in January. These mandates catapulted the U.S. bank to top spot in the quarterly investment bank rankings. In total, JPMorgan advised on nine transactions valued at $40.1-billion, including debt, according to data compiled by Thomson Reuters. Goldman Sachs & Co. finished in second, while RBC Dominion Securities Inc. ranked third.

Deal flow has picked up in 2017, with 657 tie-ups worth $72.8-billion disclosed in the first three months of the year. In contrast, 588 deals worth $67.5-billion were revealed in the same period last year.

The deals headlining the first quarter have remapped who owns the bulk of Canada's oil sands. According to estimates compiled by global energy research firm Wood Mackenzie, more than 70 per cent of oil sands production is concentrated between just four producers: Suncor Energy Inc., Canadian Natural, Imperial Oil Ltd. and Cenovus.

For much of the year, a revival in U.S. drilling activity and bloated stockpiles has kept U.S. benchmark West Texas intermediate oil hovering around $50. But sentiment about the health of the sector has swung back and forth.

U.S. government data on Wednesday showed inventories there remained swollen, growing by 1.6 million barrels last week to 535.5 million. The combination has partly offset production cuts led by Russia and the Organization of Petroleum Exporting Countries, helping to keep a lid on prices and prompting the cartel to consider extending output limits to the end of 2017.

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In March, see-sawing markets prompted two energy service firms mulling initial public offerings to first cut the amount they hoped to raise and then to put the brakes on those plans altogether.

Fracking company STEP Energy Services Ltd. was first to shelve its IPO amid falling oil prices. Fracking sand maker Source Energy Services Ltd. did the same weeks later, after initially opting to proceed with marketing its stock sale. STEP aimed to raise about $150-million (Canadian), while Source said it aimed to raise $250-million.

Smaller companies pose bigger risks for deal-makers and investors, said Robert Mark, a portfolio manager at Raymond James Ltd. in Toronto. "It's not the same as throwing a big chunk of capital at a Cenovus or a Suncor or something like that."

Bigger deals may be few and far between, as Cenovus, Canadian Natural, AltaGas and others focus on closing and digesting these transactions. Last year, TransCanada Corp. acquired Columbia Gas in a $10.2-billion (U.S.) tie-up, while Enbridge Inc. struck a $37-billion (Canadian) deal to buy Spectra Energy Corp.

"My sense is that a lot of the big players that could act have already acted. And that would lead you to believe that there will be less activity in the back half of the year than we've seen in the front half of the year," said Mr. Rawlings. "There's a lot of integration that's going to happen over the course of 2017."

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About the Authors
Capital Markets Reporter

Christina Pellegrini is a reporter at The Globe and Mail and a regular contributor to Streetwise, covering capital markets, the exchange business and market structure.She writes about the capital markets divisions of BMO, CIBC and National Bank; independent brokerages such as Canaccord Genuity; and the Canadian operations of foreign dealers including JP Morgan, Goldman Sachs, Credit Suisse and Citigroup. More

Jeff Lewis is a reporter specializing in energy coverage for The Globe and Mail’s Report on Business, based in Calgary. Previously, he was a reporter with the Financial Post, writing news and features about Canada’s oil industry. His work has taken him to Norway and the Canadian Arctic. More

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