Canada’s Oil Majors Are Sitting Out The Energy M&A Wave

After a two-year hiatus triggered by the historic oil price crash of 2020, the U.S. oil and gas sector saw a surge in mergers and acquisitions (M&A) in 2023 despite a general slowdown in deal-making in many sectors. Last year, the sector leveraged high stock prices and went on a $250 billion buying spree, mostly aimed at securing lower-cost reserves that will help them deal with future challenges.

Much of the activity was crammed into the fourth quarter with Enverus Intelligence Research (EIR), a subsidiary of Enverus, reporting that Q4 recorded a massive $144 billion in upstream M&A. During the quarter, U.S. oil majors Exxon Mobil Corp. (NYSE:XOM), Chevron Corp. (NYSE:CVX) and Occidental Petroleum (NYSE:OXY) struck deals worth a combined $125 billion to acquire low-cost oilfields with breakeven oil price in the $25 to $35 per barrel range.

Merger mania has now hit high gear: Midland, Tex.-based Diamondback Energy, Inc. (NASDAQ:FANG) recently agreed to buy privately held Permian producer Endeavor Energy Resources in a cash and stock deal valued at $26 billion. What’s impressive here is that Diamondback Energy is only valued at $31.8B (market cap). Interestingly, FANG shares have jumped more than 10% after the deal was announced nearly a week ago, meaning the market views it favorably. Stock prices of the acquiring company, more often than not, tend to go down as the company has to pay a premium coupled with the high risk of failure (Harvard Business Review estimates 70% to 90% of corporate mergers fail).

A similar trend was observed in Canada’s oil patch where energy and power M&A hit a five-year high of $70.4 billion, up 56% from the previous year. However, another notable trend stood out: Canadian mid-tier producers Tourmaline Oil Corp. (OTCPK:TRMLF), Peyto Exploration & Development Corp. (OTCPK:PEYUF), Baytex Energy Inc. (NYSE:BTE) and Crescent Point Energy Corp. (NYSE:CPG) all managed to close deals while Canada’s biggest producers including Canadian Natural Resources Ltd. (NYSE:CNQ), Suncor Energy Inc. (NYSE:SU), Cenovus Energy Inc. (NYSE:CVE) and Imperial Oil Ltd (NYSE:IMO) remained on the sidelines.

Experts are now predicting that it’s not very likely that Canada’s oil majors will continue sitting out the M&A wave since they are not immune from the factors driving consolidation, including investor fixation on growing operational scale and increasing reserves. Further, their balance sheets are in the best shape they’ve been in for years: For instance, Canada’s largest oil and gas producer by market capitalization, Canadian Natural Resources, returned $6.1-billion to shareholders in the first nine months of 2023 and has a target to return 100% of free cash flow to shareholders in the current year.

Canada’s energy giants don’t have to forego their generous shareholder payouts in order to engage in strategic M&A; rather, they can borrow a leaf from Diamondback Energy which cut shareholder payout from over 75% to a more reasonable 50% in a move that freed up enough cash to make the Endeavor Energy acquisition possible. And, just like their U.S. peers, shares of Canada’s oil and gas majors have enjoyed a very productive period over the past few years, putting them in a better position to pay for mergers using stock.

Trans Mountain Pipeline Comes Online
Last year, global consulting firm Deloitte predicted that Canadian oil prices would rally after the Trans Mountain (TMX) pipeline began transporting crude for export. Well, Canadian producers are in luck because the long-delayed pipeline is set to begin filling with crude in the current month, marking a key step toward start-up. The bulk of the 890,000 barrel-a-day line will, however, be filled in March and last about 2-3 weeks. Linefill, typically the first stage of startup, includes moving the first batches of oil from shippers. The first tanker to carry Trans Mountain oil will load in Vancouver in April.

The start-up of the expansion--now 98 per cent complete--will triple the pipeline’s capacity and reshape oil flows across the Americas. It’s also expected to spur exports to Asia and likely ramp up production of Canadian oil. Conceived more than a decade ago, the project has been handicapped by massive cost runups with costs having quadrupled to nearly $31 billion.

By Alex Kimani for Oilprice.com