Two years after an M&A boom driven by the exit of several oil majors from the oil sands, sellers of oil and gas assets are having trouble finding buyers. With persistent uncertainty about the future of Alberta’s crude oil pipeline network, sluggish capital markets, and high debt levels among potential buyers, the apparent shunning is only to be expected
The pipeline problem seems to be the biggest, according to the Financial Post’s Geoffrey Morgan. In a recent analysis of the situation, Morgan quoted merger and acquisition advisers from the oil province as saying the lack of pipeline capacity and the continuing uncertainty about when—if ever—this capacity will get a boost is discouraging potential buyers from expanding their presence in the oil sands.
Last year, M&A deals in the Canadian upstream hit US$11.2 billion, according to a survey by Evaluate Energy. This was a lot less than the US$32 billion in M&A deals in 2017 but 2017 was the year of the Big Oil exodus from the oil sands, which accounted for the size of the market then. This year, however, it looks like the value of deals will be even lower.
Since the start of the year, Bloomberg data cited by Morgan shows, there have been three asset sale deals in the upstream space in Canada. Their combined value: US$4.4 million. Now, there may be another set of deals on the way. Devon Energy announced it would be leaving the oil sands. Analyst calculations put the value of these deals at between US$3.5 billion and US$5 billion in one case and US$7-9 billion in another. As long as they sell, of course.
“Although we believe the asset base is attractive and provides a large base of concentrated production with a long resource tail, this is a challenging market to divest Canadian oil assets,” one of the analysts, Jon Morrison from CIBC wrote in a note. The culprit is once again pipeline uncertainty where only one thing is certain: new capacity will not be coming soon.
Alberta has been fighting for the expansion of the Trans Mountain pipeline that would add 300,000 bpd in capacity to the original pipeline’s, bringing the total to 890,000 bpd. This has raised hackles in British Columbia, which wants to limit the flow of crude oil across its territory. The two provinces have fought tooth and nail for and against the project and for now B.C. seems to be winning by essentially stalling the start of construction.
As a result, Albertan producers saw their crude dive to discounts of US$50 and more to West Texas Intermediate at one point last year, which prompted a desperate government decision to institute production cuts. This resulted in a rebound but did not solve the problem that is making investors unwilling to buy oil sands assets: the long-term availability of transport capacity.
Of course, there are oil trains, and Alberta is buying more of these to fill the pipeline gap, but oil-by-rail appears to be more expensive than pipeline transportation despite some arguments to the contrary. There does not seem to be a third alternative right now, although Alberta Premier Rachel Notley has mentioned an idea of building a new refinery in the province to process more crude locally instead of exporting it. It looks like M&A activity in the oil sands will continue to be sluggish until there is more clarity about the future of the local pipeline network.
By Irina Slav for Oilprice.com
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