State of Play in Canadian Oil and Gas M&A

Increases in U.S. production coupled with increased costs and regulatory uncertainty in Canada have contributed to a general investment decline in Canada’s oil and gas sector since the highs of 2014.¹

In 2017, there were several significant divestitures of assets by foreign majors, including Shell’s C$11.1 billion sale of most of its oil sands assets to Canadian Natural Resources, and ConocoPhillips’ US$13.3 billion sale of assets to Cenovus. At the same time, new investment in Canada’s clean energy sector has been relatively stable over the last few years, although it still does not match the highs experienced between 2010 to 2014, as government incentives have wound down and the global trend towards the adoption of clean energy continues.²

Recent Moves to Consolidate and Focus Strategy

There has been increased M&A activity in the Canadian energy sector this year, with companies seeking to consolidate and focus their strategy. The negative investment climate and the discount on Alberta’s Western Canada Select relative to global oil prices (primarily due to lack of pipeline capacity to move Alberta’s supply) have created buying opportunities for those in the energy sector who believe valuations no longer make sense. 

Select transactions in the oil and gas sector include:

• Vermilion Energy’s acquisition of Spartan Energy for $1.4 billion in May 2018, combining oil producing properties in Saskatchewan, Alberta and Manitoba with Vermilion’s other interests in Saskatchewan.³ This followed Vermilion’s smaller $90.8 million acquisition of oil assets in Saskatchewan and Manitoba earlier in the year.
• Baytex Energy’s acquisition of Raging River Exploration for $2.8 billion in August 2018, combining their North American oil and natural gas assets.
• Superior Plus’ acquisition of the equity interest in NGL Energy’s U.S. retail propane distribution business for US$900 million in July 2018, adding to Superior Plus’ Canadian and US propane distribution businesses.⁴
• Enbridge’s sale of its Canadian natural gas gathering and processing business to Brookfield Infrastructure for $4.31 billion, announced in July 2018,⁵ and its sale of certain US natural gas assets for $1.4 billion to ArcLight Capital Partners, in August 2018, in support of Enbridge’s strategy moving towards a pure pipeline and utility business.

In the clean energy sector, we have seen consolidation by financial buyers, including Canada Pension Plan Investment Board, which announced in April the acquisition of certain renewable energy assets in Ontario from NextEra Energy Partners for US$1.3 billion and acquired certain North American and European renewable energy assets from Enbridge for C$1.75 billion in August.⁶

Recent Hostile M&A Activity

So far this year we have seen several hostile bids in the Canadian oil and gas sector where lower valuations have persisted despite oil trading around a four-year high. Companies rebuffed in their attempts for friendly negotiation are willing to launch a hostile bid in light of continued depressed valuations and favourable deal metrics. In October, Husky Energy launched a C$6.4 billion bid for MEG Energy following discussions that terminated in August.

Expect investment and M&A activity in the clean energy sector to carry on as companies set targets and Canada focuses on being a global leader in clean energy.

The outcome of a Canadian hostile bid is almost always a change of control of the target, either in favour of the hostile bidder or a white knight. Recently, Ensign Energy Services’ C$947 million bid for Trinidad Drilling at C$1.68 per share in August (after Trinidad announced it was ending its strategic review process) was topped by a friendly bid from Precision Drilling at C$2.11 per share in October.⁷ Earlier in the year, Velvet Energy launched a C$120 million hostile bid for Iron Bridge Resources at C$0.75 per share.⁸ In September, following a formal process by Iron Bridge to explore strategic alternatives, Velvet agreed to an increased offer of C$0.85 per share, supported by Iron Bridge’s board and major shareholders.

These deals followed Total Energy Services’ hostile takeover of Savanna Energy Services in 2017, a deal in which Western Energy Services emerged as an unsuccessful white knight. The parties remain in litigation over the treatment of the break fee and whether it was payable to Western.

Outlook and Considerations

Recent divestitures by foreign companies have resulted in changing ownership structures for the Canadian oil patch. 2018 M&A activity appears to be continuing this trend of consolidation and opportunistic buying. As investment in Canadian shale assets continues, such as LNG Canada’s recent decision to proceed with its C$40 billion liquefied natural gas project in British Columbia, we may start to see further consolidation focused on shale and natural gas assets.

We expect investment and M&A activity in the clean energy sector to carry on, as more companies set clean energy targets and Canada continues to focus on becoming a global leader in clean energy. Companies looking to acquire or divest of clean energy assets can find attractive opportunities, resulting from significant investment in prior years.

Lastly, we expect hostile M&A in the energy sector to keep pace with activity in recent years as companies continue to pursue opportunities given current valuations and accretive deal metrics.

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¹ See https://www.neb-one.gc.ca/nrg/ntgrtd/mrkt/snpsht/2018/08-01nvstmntcndl-eng.html.

² See https://data.bloomberglp.com/bnef/sites/14/2018/07/BNEF-Clean-Energy-Investment-Trends-1H-2018.pdf.

³ Torys acted for Vermilion.

⁴ Torys acted for Superior Plus.

⁵ Torys acted for Enbridge.

⁶ Torys acted for CPPIB.

⁷ Torys is acting for Precision Drilling.

⁸ Torys acted for Iron Bridge.