Despite widespread anticipation that 2015 would see an increase in oil and gas M&A and related financing activity, there turned out to be significantly less activity in 2015 than there was in 2014, as crude oil prices remained below US$50/bbl and more recently fell below US$40/bbl.
With few exceptions, oil and gas M&A activity was limited to smaller and fewer transactions in 2015. Hostile acquisitions of size were limited to Suncor’s $4.1 billion hostile offer for Canadian Oil Sands. Consensual acquisitions of size were rare (with exceptions such as Crescent Point’s $1.5 billion acquisition of Legacy Oil + Gas and Whitecap Resources’ $500 million acquisition of Beaumont Energy) as agreements on the relative valuations and on who the surviving management would be remained difficult to achieve.
With the continuation of a low commodity price environment for significantly longer than most oil and gas company boards of directors and management teams hoped for and with highly prioritized, or for many subsistence-level, capital programs and slashed g&a budgets already implemented, pressure continues to grow on the boards of directors and the management teams internally and from lenders, potential merger partners and potential acquirors externally.
Boards of directors are now frequently in the position of having to respond to approaches at a significant premium to current trading prices that 18 months ago would have been characterized as a more than adequate change of control premium but which now, in the context of historically (short term) low commodity prices, are considered by the board or management to be opportunistic and unreflective of true fair value. At the same time, the board must be wary of the possibility that the company’s shareholders may be pleased to have the opportunity to accept the premium price.
Compounding the current low commodity prices in curtailing M&A and related financing activity has been uncertainty in numerous categories, including:
- future commodity prices
- governmental uncertainty federally with the recent election of the Liberals and the potential impact of:
- foreign investment review
- climate change legislation
- governmental uncertainty in Alberta with the election of the NDP and the potential impact of:
- royalty review
- climate change legislation
- corporate tax increases
- a more distant relationship with the business comunity
- infrastructure limitations, including pipelines for market access, impacted by:
- the rejection of Keystone XL by President Obama
- First Nations and environmental considerations in the advancement of proposed projects
All in all, this creates a difficult context in which to undertake M&A activity, domestically and in respect of potential foreign players making capital allocations within their global portfolios on a competitive basis with opportunities in other jurisdictions in Canada, and incrementally in Alberta. However, at least some of the uncertainty should be resolved in early 2016, including with respect to climate change legislation and Alberta’s royalty review. At the same time, other drivers will increase pressure on exploration and development and oilfield service entities in 2016. It does not seem overly bold – particularly in light of the minimal activity in 2015 – to predict that oil and gas M&A and related financing activity will increase in 2016.