Canada's Oil Patch: M&A Activity Heating Up

by: FP Trading Desk

M&A activity is heating up in Canada’s oil patch with three separate acquisitions announced on Monday alone. Daylight Resources Trust (OTC:DAYYF) agreed to buy Highpine Oil & Gas Ltd. (OTC:HPNOF), Crescent Point Energy Corp. (CPGCF.PK) said it is taking over private Saskatchewan producer Wave Energy Ltd., and Crescent Point also announced the acquisition of a suite of Saskatchewan assets, likely from Provident Energy Trust.

These deals follow the recently announced spinout of Canadian business units by Petrobank Energy and Resources Ltd. (OTCPK:PBEGF) into a newly formed Bakken producer to be named PetroBakken in conjunction with the acquisition of Tristar Oil & Gas Ltd. (OTC:TOGSF), Baytex Energy Trust’s (NYSE:BTE) purchase of True Energy Trust’s southwest Saskatchewan assets, Insignia Energy Ltd.’s acquisition of Grey Wolf Exploration Inc. (GW), a series of Saskatchewan oil assets by Glamis Resources Ltd., and NuVista Energy Ltd.’s (OTC:NUVSF) purchase of Advantage Oil and Gas Ltd.’s assets.

Blackmont Capital analyst Alexander Klein noted that with the exception of the NuVista and Insignia deals, all assets were oil weighted. Meanwhile, the transaction metrics of oil in Saskatchewan (with the exception of True’s heavy oil assets) are significantly higher than those of Alberta (Highpine). Mr. Klein attributed this to the better royalty regime and higher netbacks in Saskatchewan, as well as Highpine’s low valuation.

Despite the very low acquisition metrics for Highpine, the analyst does not believe a competing offer will emerge because the takeover by Daylight is friendly and competitors will have no access to Highpine’s data room.

Mr. Klein said in a research note:

Acquisitions in a low commodity price environment should be no surprise as this is the time companies with strong balance sheets and access to equity capital will be on the hunt for both synergistic corporate and property assets. Meanwhile, sellers may be challenged by both a lack of balance sheet flexibility and dearth of growth opportunities, making it difficult to operate as a going-concern.

Companies also appear to be adjusting their longer-term strategies to re-balance gas-weighted portfolios to oil and to add growth-generating assets as the trust tax deadline looms.

The analyst said entrenched management and a disconnect between the long-term commodity price expectations of buyers and sellers represent obstacles to successful transactions, the analyst added. Nonetheless, he expects more acquisitions and combinations are on the way.