Canadian energy companies will likely sell more E&P assets in the next several months, driven by weaker producers shoring up their balance sheets and the longer-term prospect of oil prices stabilizing, deal advisers said.
M&A activity in the Canadian energy patch has waned since oil prices began sliding more than two years ago. Many deals have involved midstream assets such as pipelines, storage and processing facilities, which are more likely to offer steady cash flow.
The expected shift to the E&P segment, which tends to carry both higher risks and rewards, comes as companies that hoped to hold on to their prized assets are under more pressure than ever from lenders and bondholders.
"There are not as many buyers as there are sellers," said Janan Paskaran, partner at Torys LLP. "There's still a big pricing gap, and the only way for companies to get deals done is to let go of a crown jewel or one of their best assets."
The number of upstream energy deals in 2015 and so far in 2016 is below levels in 2014, data from Wood Mackenzie show.
Large- and mid-sized energy companies with the resources to buy assets, as well as private-equity firms, have mostly shown restraint despite the drop in oil prices. Some advisers said that will start to change.
"Energy producers are sitting on dry powder to deploy on E&P assets. The capital is waiting to be used," said Noralee Bradley, partner at Osler, Hoskin & Harcourt LLP.
She predicts more asset sales in the E&P area compared with the midstream deals seen in recent months.
Last month Inter Pipeline Ltd. agreed to acquire Williams Cos. Inc.'s Canadian midstream business. In July, CPPIB-backed Wolf Infrastructure signed a deal to buy Devon Energy Corp.'s (NYSE: DVN) Access Pipeline stake.
"We could see more E&P transactions, although it's still a challenging environment with commodity prices," said a Canadian investment banker, speaking on condition of anonymity as he was not authorized to talk with the media.
Oil prices fell as much as 3% on Sept. 13 after both the world's consumers and producers revised forecasts that signaled the global crude glut will persist.
But increased sales of E&P assets would indicate increasing confidence that the market is turning, noted Global Securities strategist Elvis Picardo.
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