2022 Top Operators Report: The Great Reset
Editor’s note: The last five years have been a hard ride for Canadian oil and gas producers.
Wild price volatility, a pandemic-induced price crash, ongoing market access issues, oil production curtailment, the rise of the ESG movement, and finally a geopolitical crisis are just some of the challenges industry faced.
The end result of this period of instability is a reinvigorated industry ready to take on the world as the commodity cycle turns once again.
The 2022 Top Operators Report examines the 2017-2021 timeframe, identifying key trends that shaped the present energy landscape and what lies ahead for the 62 Canadian headquartered public operators tracked this year.
To sort through these challenges we are once again leveraging the experience of professional services firm KPMG in Canada to provide insight into the last five years of change and what strategies operators could pursue to thrive in the inevitable turbulence ahead.
Data analysts from Evaluate Energy are providing context to the stream of information coming from corporate financial reporting and other relevant documents. Analysts from geoLOGIC systems ltd. offer context into trends in activity and technology to manage costs.
We’re also tapping into a broad swath of the insights and opinions from industry leaders gleaned from Daily Oil Bulletin coverage.
To download the 2022 Top Operators Report, click here.
Five years of low and volatile oil and gas prices punctuated by a global pandemic have led to a fundamental restructuring of Canada’s oil and gas sector.
Over $90 billion in mergers and acquisitions have been completed since 2017 as exploration and production companies with strong balance sheets and support from capital markets pursued countercyclical opportunities. Consolidation occurred within major growth areas of the WCSB as operators captured market share and jockeyed for position to supply future oil and gas demand. Market access constraints eased as new egress connected growth areas to new markets while eliminating bottlenecks.
Now, as prices and the pricing outlook have improved, these operators are set to prosper through another cycle. And, as energy affordability and security of supply have returned to the global energy sustainability conversation, potential for future supply growth looks promising.
M&A activity has redrawn the Canadian corporate landscape the last five years, said Mark Young, senior analyst at Evaluate Energy. Global multinationals have divested over $37 billion in assets and 735,000 boe/d of production since 2017. Canadian operators have been on the buying side.
In the oilsands, this resulted in a concentrated core of operators. “The top four oil and liquids producers in Canada — all four major oilsands operators — now control 57 per cent of oil and liquids production,” said Young. “All are now integrated downstream to some extent.”
Cenovus Energy Inc. was the acquirer in two multibillion-dollar deals. Cenovus spent $17.7 billion in 2017 buying out partner ConocoPhillips’ 50 per cent stake in the Foster Creek/Christina Lake oilsands assets and the majority of ConocoPhillips’ Deep Basin properties. Cenovus retained its 50 per cent non-operated ownership in the partnership’s U.S. refining assets.
In 2020 it acquired Canadian competitor Husky Energy for $15 billion. Husky’s main assets were heavy oil resources and production in the Lloydminster and Cold Lake areas, oil and gas production in northwest Alberta, as well as development off the Newfoundland coast. Husky also held interests in Asia and refineries in the United States.
The two deals pushed production to around 750,000 boe/d. Cenovus is now the second largest Canadian-based refiner and upgrader, with total capacity of approximately 660,000 bbls/d, including approximately 350,000 bbls/d of heavy oil capacity.
According to Alex Pourbaix, the company’s president and CEO, the goal now is to make Cenovus investable at WTI $45/bbl. “We absolutely have to be sustainable at the bottom of the cycle. Our capital program and dividend have to be fully funded at that point.”
Upstream, the days of executing on phased mega-projects to add organic production are over. Instead, Cenovus will deliver on smaller, less expensive optimization projects that capture more resource while using available capacity at facilities.
Downstream, it will continue to take on more refinery ownership or operatorship if the opportunity presents itself, said Pourbaix.
“The Husky deal has allowed us to think differently about non-operated assets and providing counter-cyclical revenues. We’ve acquired the operational and intellectual capacity to run downstream assets and operate as a molecularly integrated company. We think there is value in owning and operating refineries. Molecularly connecting to upstream operations is important to us.”
There have been close to $70 billion in total oil and liquids focused deals valued at over $100 million in the last six years, with 1.15 million boe/d of production switching hands, said Young. The top 10 oil and liquids operators in Canada now control 70 per cent of production, up from 57 per cent in 2017.
The natural gas sector has seen similar consolidation while production migrated to liquids-rich areas in the Alberta foothills and the B.C. Montney. Twenty deals over $100 million were completed in the last five years with a total value of nearly $18 billion. Around 730,000 boe/d of production changed hands. The top 10 operators now account for over half of Canadian gas production, with the top four operators producing 36 per cent in 2021, according to Evaluate Energy.
“It’s been a buyers’ market in Canada since the oil price collapse,” said Young. “We’ve seen a few multibillion-dollar megadeals but the majority of deals have been in the $100 million to $1 billion value range. Most have been gas weighted companies consolidating assets in core areas, or tight oil specialists building out core areas or transferring expertise into other plays. Many larger junior and intermediates were active to gain the scale to compete for investment in tight capital markets. More recently, we have seen consolidation in emerging areas like the Clearwater heavy oil play or Charlie Lake play in northwest Alberta.”
ARC Resources Ltd.’s early 2021 acquisition of Seven Generations Energy for $4.7 billion ranks as the largest natural gas deal in the last five years. The deal lifted ARC’s production to 340,000 boe/d, making it the largest pure play Montney producer, Canada’s largest condensate producer, third-largest natural gas producer, and sixth-largest upstream energy company.
Looking back at the deal a year later, ARC president and chief executive officer Terry Anderson said it positioned the company well.
“We’re realizing the benefits of scale in real time across the supply chain, helping curb inflationary pressures and expanding our downstream capabilities. We’re now operating in an environment where we think that ARC’s scale, balanced commodity and jurisdictional exposure, infrastructure ownership and downstream reach will be significant competitive advantages moving forward.”
Replicating a similar deal in the current environment would be “highly unlikely,” Anderson added. “The environment has changed, and we’ve consistently stated that M&A must make our business stronger, more profitable, and it must be a far better use of capital above all else. Fortunately, ARC has amassed a large inventory of highly profitable organic opportunities, and we’re able to buy our assets by investing in our shares, which currently yields a far better return for our shareholders than M&A.”
Tourmaline Oil Corp. took a different approach and embarked on a series of mid-sized acquisitions to build out core areas in the Deep Basin and Montney natural gas plays.
In the Deep Basin, Tourmaline reported 2021 average production of 250,000 boe/d.
“We have produced over 22 tcf as an industry so far, but from our analysis there’s still 76 tcf between the horizontal and vertical inventory,” said Mike Rose, company president and chief executive officer.
“The Montney is producing about 8.6 bcf/d between Alberta and B.C. now, so a little over half of what the whole basin is producing,” added Rose. “As far as where it sits in its development life, we are at 22 tcf, so it has already produced as much as the Alberta Deep Basin.”
“It’ll backstop, if we chose to, a very large Canadian LNG business,” Rose added. “Hopefully that materializes.”
Whitecap Resources Inc. has been on a similar acquisition spree, building its asset base in both oil and gas resource plays. Since 2020 the company has spent almost $3.8 billion, including its recent deal to acquire XTO Energy’s Montney and Duvernay assets for $1.7 billion in cash.
Calling the XTO acquisition “transformational” for his company, president and chief executive officer Grant Fagerheim said the deal makes good business and operational sense.
“We have been pursuing a portion of these assets for quite some time now and getting our hands on the entire asset base helps enhance our long-term sustainability and profitability.”
Fagerheim said the company’s initial plans are to grow this asset to 50,000 to 60,000 boe/d over the next three to five years, at which point there will still be 20 years of tier one drilling inventory to maintain production.
The XTO deal made Whitecap the largest non-oilsands oil-weighted Canadian producer.
Running parallel to asset consolidation has been an incremental increase in egress out of Western Canada, said Bemal Mehta, managing director, Energy Intelligence, at geoLOGIC systems ltd.
On the oil side, Enbridge’s Line 3 replacement is now operational, doubling its capacity to around 760,000 bbls/d. The Trans Mountain pipeline expansion (TMX) also continues its rocky road toward construction completion, with capacity expected to increase from 300,000 bbls/d to 890,000 bbls/d.
“Line 3 is almost at capacity so TMX is essential to support incremental Canadian oil production increases.”
The North American gas market is undergoing a major restructuring, said Mehta. After declining for the last decade, Canadian net gas exports to the U.S. rebounded to 6.1 bcf/d in early June 2022, up 15 per cent from last June.
“Large operators with security of supply are signing contracts to export Canadian gas through U.S. LNG export terminals. Others are signing long term deals to supply Alberta power generators,” said Mehta. “When LNG Canada starts mid-decade it will add another dimension and integrate Canada into global gas markets.”
The large upswing in global oil and prices resulting from a long-term lack of capital investment in new production and more recent geopolitical stresses are changing the conversation around energy, Mehta added. While efforts to decarbonize energy supply continue, affordability and security of supply are now front-and-centre.
To download the 2022 Top Operators Report, click here.