Exasperated by paltry returns, they are cutting off funding in some cases and pushing companies to either restructure or sell out to larger companies.
“I think you’re going to see that trend of smaller companies trying to get into bigger companies,” Chari said, noting that banks and creditors have been less willing to lend to intermediate producers and are more likely to demand a restructuring, merger or sale of the company.Article content continued
Waterous, who divides his time between Banff and Calgary, has been advising energy firms on deals for decades, with his own advisory called Waterous & Co. beginning in 1991. In 2005 he sold the firm to Scotiabank to create Scotia Waterous. He left Scotia in 2017 to set up the private equity Waterous Energy Fund. And after years of watching investments in the Canadian energy sector decline, he says there are major opportunities for consolidation.
As creditors push oil producers to sell assets or sell themselves outright, there’s been an uptick in Canadian oilpatch deals over the summer. Since June, there have been five M&A deals valued at $828 million, according to FP Data, taking year-to-date figures to $1.65 billion across 23 deals. In contrast, there were 42 M&A deals during the same period valued at $15.47 billion.
“That valuation caught many by surprise. I don’t know if I would expect more of that type of valuation necessarily. It’s hard to grapple with how many of those are out there,” Wood said. However, since the Canadian oilpatch has been under pressure as a result of weak prices and lack of export pipelines in the past decade, there are fewer domestic companies that are in a position to acquire distressed companies through this most recent cyclical trough.
Instead, Nuttall said he’s looking to invest in companies that aren’t over-leveraged and can generate cash in excess of their expenses at current prices. He believes the Canadian energy industry is undervalued relative to oil stocks in other countries and relative to other industries. The S&P Capped Energy Index is down 37 per cent year-to-date, compared to a 2.65 per cent decline of the main Canadian index.
It is a tough industry- needs some national champions to make a go of it