Oil and gas dealmaking

David Cuschieri (00:06): Recently global energy prices have remained relatively high, and by recently in the last year or so, and it is primarily due to underinvestment in new production, probably also due to OPEC supply restrictions as well as recovering post-pandemic energy demand. At the same time, Russia's invasion of Ukraine has definitely increased the volatility in the global market and as well it’s raised legitimate concerns around energy security. In light of these current economic and political circumstances, I'm really interested in having a better understanding of how this is affecting M&A activity that you guys are seeing. So I thought maybe Peter, you can elaborate back in your recent experience on M&A activity.

Peter Danner (00:58): Thanks, David. Well, while M&A activity in the Canadian oil and gas space, it's not been directly affected by the geopolitical events in Europe, Western Canadian producers have benefited from higher commodity prices and a renewed focus on energy security, as you mentioned. So far this year, we've seen strong and sustained M&A activity, but it's likely we will end the year below the exceptionally busy levels that we saw in 2021. Scale continues to be important with a number of significant acquisitions in the sector. The most notable transaction in terms of deal size was Pembina and KKR’s combination of their natural gas processing assets in Western Canada into a new joint venture valued at over $11 billion. Heading into 2023, deal activity should be maintained as potential purchasers view the increased commodity prices as sustainable, notwithstanding any slowdown in the overall economy. However, unless acquirers are willing to pay higher prices, sellers will be incentivized to hold on to assets generating significant amounts of cash right now, which could result in a drag on transactional activity.

David Cuschieri (02:03): So given the umbrella of what we’re discussing here, which is energy transition, what are some of the persisting themes from an energy transition perspective that you think are going to continue to influence these M&A transactions and activity overall?

Peter Danner (02:21): Yeah, well we're certainly seeing that ESG considerations continue to be a significant priority, both for financial investors and corporates in the energy sector. Transacting parties are considering ESG factors at every single stage of the transaction. ESG has also been driving transaction activity in its own right, particular areas where we're seeing this are in LNG, Indigenous equity transactions, carbon capture and hydrogen development.

David Cuschieri (02:50): Great. The LNG is an interesting one. You know, the global importance of LNG as well as Canada's emerging LNG industry to me it is really interesting, Derek, I know you got a lot of experience in the LNG sector and you’ve been recently in on some LNG transactions. I'm wondering what are your thoughts on the current status of the Canadian LNG development?

Derek Flaman (03:12): Frankly about 10 years behind the US and Australia in getting that industry off the ground. I think though the Ukraine-Russia situation is frankly accelerated where we need to be and so we've seen a lot of activity in terms of inbound calls from clients looking to help get that LNG industry off the ground, both in Western Canada and hopefully as well in Eastern Canada. We just recently finished acting for Enbridge with respect to its 30% investment into the Woodfibre LNG project in Squamish, which I think is the second major LNG project that's been permitted and is now proceeding to execution. I'm hoping that we're going to see a lot more. Realistically if we can get five to six LNG projects up and running in the next three to five years, that will be, I think, a significant benefit to Canada’s overall industry.

David Cuschieri (04:24): Another really important influential factor that you discussed, Peter early on just touched on, was the direct involvement of Indigenous groups in some of the M&A projects that we're seeing, which is really important and really interesting. I'm wondering if you would shed some more light on that.

Peter Danner (04:44): In recent years, the energy industry has shifted away from more traditional impact benefit agreements to a more dynamic situation where Indigenous groups are either leading proponents or become partners in projects through meaningful equity ownership arrangements. This model provides Indigenous partners with opportunities to have more insight into commercial decision making, and to obtain their own source revenue for the benefit of their communities. The most notable transaction in this space is the recent sale by Enbridge of a non-operating minority interest in its regional oil sands pipelines to a consortium of 23 Indigenous communities in Northern Alberta for $1.12 billion, and financing for that deal supported in part by the Alberta Indigenous Opportunities Corporation, which is a Crown corporation whose mandate involves bridging the gap between Indigenous groups, seeking commercial partnerships in major projects and their financial capacity.

David Cuschieri (05:37): Interesting. To move us in a slightly different direction. I think, given that the umbrella of this discussion was where is the Road to Net Zero series, we have primarily discussed energy transition initiatives and those related matters. However, I think we would be absolutely remiss if we didn't take a minute to step back and definitely stress the vital importance of more traditional forms of energy sources. You know, I think it's pretty clear that currently and looking forward to the foreseeable future, traditional energy sources are by far the predominant component of the energy for global consumption. And I think that it will continue to be for a long time to come. And Derek, with all of your experience coming from the industry and in the area, I’m really interested to hear your thoughts on traditional energy sources and how they play into the current economic and political climate.

Derek Flaman (06:41): I think you put it really well, we all recognize the importance of the environment, ensuring that we would be protected in the best way that we can. But practically speaking, there's other priorities, including keeping people warm, keeping people cool, and feeding what’s a very growing population globally. So it's just the practical reality that we need to have the traditional sources of energy, which are oil and gas, and Canada produces oil and gas in a more responsible way than any other oil producer, gas producer on the planet. So I think we should continue to fulfill that obligation of feeding people, keeping people safe, both in terms of heat and in terms of cold on a go-forward basis. And the only way to do that for the foreseeable future is through oil and gas development. In terms of the politics that we're now seeing primarily in Russia and Ukraine, but it could spread to other parts of the world quite easily, it's imperative that we try to fulfill any void that's going to be created as a result of Russia's effective weaponization of the energy industry. So from Calgary Torys’ oil and gas group’s perspective, it's important that we continue as one of the largest oil producing nations in the world to continue to fulfill what's going to be not only an existing need for traditional sources of energy, but a growing need over the next 20, 30, 40 years.

David Cuschieri (08:32): Yeah, that makes a lot of sense. So with Derek’s final words, I think that completes the Road to Net Zero Energy Transition series. If anybody wants more information on what we're doing at Torys, please visit www.torys.com.