'Hope is not a strategy': M&A heats up as new era rattles oil patch
Adapt or die. That could very well be the mantra of Canada’s energy sector right now.
The ground has been shifting for almost five years, but with this year’s short-lived Saudi-Russia price war and the devastating demand destruction caused by COVID-19, an entirely different landscape is starting to take shape.
“Investment bankers are busy, lawyers are busy," ARC Financial Corp. President Brian Boulanger told BNN Bloomberg. "Generally, if your company looks the same as it does today six to twelve months from now, you’ve probably failed.”
Boulanger has more than two decades of experience with Calgary-based ARC, Canada’s largest energy-focused private equity manager. He began as an investment analyst with the company in 1997, quickly moved up to become president, a role in which he is responsible for all of its investment activities as well as identifying and developing new opportunities. He says many energy companies are now realizing they need to move quickly to strengthen their business model in order to survive in today’s new, more difficult reality.
“You’ve got to do something. Just sitting around waiting for recovery is not going to do it. You’ve got to try to get bigger, reduce costs and build resiliency. Hope is not a strategy, as they say."
ARC Financial is already part of the early M&A action: it’s a major player in the planned combination of Steelhead Petroleum Ltd., Rifle Shot Oil Corp. and Primavera Resources Corp. with Longshore Resources Ltd. in a deal that’s expected to close on July 1.
“The four companies we are bringing together were all strong. They are financially conservative, with good balance sheets and well hedged,” said Byron Nodwell, CEO of Longshore. “This is not a survival play for weak companies, but a durability play for strong companies.”
This single, larger entity will have a production capacity of more than 14,000 barrels of oil equivalent a day. Boulanger said the move makes strategic sense by bringing together quality oil plays that complement each other.
The larger company will also have a more diverse portfolio including heavy oil, light oil and natural gas, which means it will have more flexibility when facing ups and downs in the market. Longshore’s light oil assets in Charlie Lake, an area in northwestern Alberta, will be combined with low-cost oil assets in Mannville, Alberta, several blocks in the Viking resource play on the southern border of Alberta and Saskatchewan as well as a large parcel of land in the Montney formation in Northeastern British Columbia.
“[Longshore] has optionality in its portfolio. It can choose to focus on heavy oil or natural gas depending on where the cycles fall,” said William Lacey, Steelhead Petroleum’s chief financial officer. “With the bigger scale, it should have more ability to get better deals on a number of fronts.”
ARC Financial is the majority investor in each of the four companies. That controlling interest helped it get all of them to the table and make big decisions much faster.
“It’s really hard to have perfect clarity on what exploration and production executives want to do,” said Boulanger. “You really need to fight through lack of clarity and be as decisive as possible right now.”
Timing is key. The recent global volatility in oil prices hit just as companies were undergoing their annual bank line reviews. Many energy companies, especially smaller ones, are feeling the financial squeeze getting tighter and are looking for options.
“The junior [oil and gas] model is very, very challenged,” said Lacey. “Of course, there is going to be room for guys who have creative approaches to the business, but just doing the same thing, and on a small scale, there’s just not a market for that. Not right now.”
As the new reality kicks in, the gap between buyers’ and sellers’ expectations is narrowing.
“There’s a lot of need for consolidation in the industry,” according to Nodwell. “The access to capital is very challenged. A lot of names are hunting for the same pool of capital.”
“The path out of this is going to be rocky. There’s going to be a lot of volatility and it’s going to be tough.”
Over at Canoe Financial, another major player in Canada’s energy industry, they’re seeing the same thing.
“The industry was depending on the federal government’s ‘hours, if not days’ bailout,” said Rafi Tahmazian, senior portfolio manager at Canoe, in a recent conversation with BNN Bloomberg. “There’s now no more room for hope and the longer we go, that hope is transferred into reality.”
He said the ARC-led transaction is an early sign of what’s to come. According to Tahmazian, weaker companies need to understand that there is a flight to quality and liquidity, and it may be in their best interest to reach a deal sooner rather than later.
“We’re deep in the throes of trying to figure out some logical transactions that are going to start to occur, we think, imminently,” he said.
Of course, consolidation often means layoffs-- something the energy patch has been struggling with for years. Within the last couple of weeks alone, Ovintiv Inc. and Keyera Corp. announced job cuts. And Enbridge Inc. said about 800 employees stepped forward to take early retirement, leaves or reduced hours.
Nodwell said the Longshore amalgamation will result in the loss of 23 positions across the various companies. “We are taking about 10 people from the head offices and all field staff will be kept,” which he pointed out is important to the continuity of the operations. Among the employees being let go in the process is Steelhead Chief Financial Officer William Lacey.
“It’s a great industry, but it’s changing and it’s time it changed,” Lacey said. “ARC has been one of the first out of the gate to do this and they won’t be the last. And I hope not.”
Longshore isn’t done either. Once this transaction is complete, it will be on the lookout for more deals.
“Due to Longshore’s strong liquidity position and continued support from ARC Financial, Canada’s largest energy focused private equity manager, Longshore is well positioned to engage in further consolidation in its new and existing core assets,” the company said in a June 8 press release.
“That was part of the reason for putting out the release,” said Boulanger. “They want people to know who they are and that they want to play offence.”
In terms of what is on Longshore’s radar, CEO Byron Nodwell is blunt:
“We are looking for things that are complementary – by that, I mean high quality. We’re looking to bolster our asset composition,” he says. “We’re not looking for just anything. It’s a race to quality now. If you have low quality assets, you won’t survive. We’re on the hunt for the good stuff.”