Deloitte Expects An Uptick In M&A Activity

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The 2023 Canadian oil and gas merger and acquisition (M&A) market is likely to be centered around companies that already have ample assets in premium plays and that are looking for strategic add-ons and opportunities, says Andrew Botterill, Deloitte Canada’s oil, gas and chemicals leader.

And he points to Crescent Point Energy Corp.’s deal announced March 28 with Spartan Delta Corp. to acquire Spartan's oil and liquids-rich Montney assets in Alberta for $1.7 billion in cash as an example of what might be in store.

“We saw the Crescent Point deal last week. It was a very significant deal for an asset, not a corporate. I think for premium assets there is still going to be a really strong M&A market because the companies that had strong cash flows in 2022, they have the cash to do the deal and they’re not looking to have to do a lot of banking or lending. So, I think we might see some more deals come this year than we saw last year,” Botterill told the Bulletin.

“But it’s going to be on really focused stuff. It’s not going to be companies wanting to grow just for the sake of growing. It’s going to be companies that are wanting to buy assets that are really focused and that are in and around their operations and show even more resiliency in their portfolio,” he added.

“If they’re just premium, tuck-in-type assets, I think we’ll see a lot of deals in plays like the Montney or Clearwater or the Duvernay.”

In its updated 2023 oil and gas forecast released Wednesday, Deloitte Canada included a special section on global oil and gas M&A called, “Buy with purpose, sell with strategy.”

And the firm said that throughout 2022, global M&A activity in the upstream oil and gas sector “struggled” as benchmark oil prices surged over US$100 and the “gap between buyer and seller valuations” widened.

“As discussed in Evaluate Energy’s Global upstream M&A reaches just $20 billion in Q4 2022 report, M&A spending slumped to 40 per cent lower than the five-year average of Q4 activity. When deals were not achievable, organizations resorted to focusing on shareholder dividends, share buybacks and deleveraging balance sheets,” Deloitte said in its report.

“A few key factors that created headwinds for deals besides the commodity market were elevated free cash flows, shifting geopolitical priorities and an increased focus on investments in energy transition.

“In contrast to the distressed situations seen in recent years, the focus on reducing leverage created an impasse environment that hindered transactions.”

But, according to the firm, the M&A market could be shifting and more deals could be enacted as the financial and debt positions of many E&Ps are vastly improved after often stellar 2022 results that were buoyed by high commodity prices.

“With reduced debt and record cash flows, operators are now well positioned to manage volatility in 2023, particularly if they maintain capital and operating discipline. Healthy balance sheets led to less reliance on external debt for deal financing, with only seven per cent of sector activity funded through debt in 2022,” Deloitte Canada said.

“Funding deals through cash and equity are expected to continue in the foreseeable future, reducing the short-term effects of interest rate hikes on transaction value.”

Deloitte’s outlook on oil and gas M&A in 2023, released in February, digs into these themes and trends in more detail.

Corporate mergers, JVs are in vogue

Botterill and Deloitte Canada say corporate mergers and joint ventures are “expected to continue to outweigh” asset acquisitions as companies look to consolidate production and optimize operations.

“Equity-based transactions completed during such mergers and ventures represent less premium value for the deal, as they are based on inherent traded stock value at the corporate level,” he said.

“The scale of operations has enabled organizations to be competitive and withstand volatile price markets and cyclical energy usage, which will be ongoing themes to monitor in the coming year.”

The firm also noted that as the world grapples to “mitigate energy security concerns and rising energy prices” against a backdrop of geopolitical tension and the war in Ukraine, “we expect natural gas supply and LNG assets will be the focus of industry transactions.”

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  • M&A

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