After all the frenetic deal-making of the past few years, Canada’s oilpatch is now finding itself in the grip of an unaccustomed drought of mergers and acquisitions. Pacific Rubiales Energy’s $935-million bid for Petrominerales announced Sept. 30 was the exception that proves the rule. Or maybe it was the rule; the buyer in this case came from Toronto.
The Calgary lawyers and investment bankers whose lifeblood is deal flow are beginning to worry. CIBC vice-chairman Jim Prentice noted in a speech that, year to date in 2013, foreign energy investment in Canada is down by a staggering 92%—$2 billion versus $27 billion for the same period in 2012. Total M&A activity is just $8 billion this year, compared to $66 billion last year.
“You don’t want to read too much into this short-term data,” says Craig Hoskins, a Calgary lawyer with Norton Rose Fulbright, noting 2012 was exceptional because of China National Offshore Oil Co.’s $15-billion takeover of Nexen, and Petronas’s $6-billion acquisition of Progress Energy. Nevertheless, he adds, “There’s clearly a bit of a chill in the pace of M&A.”
Foreign investors hit the brakes last December, shortly after the Harper government approved the Nexen and Progress deals and the prime minister warned that future takeovers in the oilsands by state-owned enterprises (SOEs) would be approved on only an exceptional basis. But that, and related changes to the Investment Canada Act, aren’t the only reason investment has fallen. “A lot of the low-hanging fruit, the obvious targets, have now been acquired,” says Brent Bieber, vice-president, investment banking at Paradigm Capital. Add to that a global shift away from commodity investment.
Asian investors in particular are growing weary of Canada’s sluggish pace of building energy infrastructure—the pipelines and liquefied natural gas facilities needed to get Canadian fossil fuels to offshore markets. Last year, Norton Rose sent Hoskins to China to work with SOE executives. They reminded him they’d been at the table with Enbridge back in 2007 when it said its Northern Gateway pipeline from Alberta to British Columbia’s west coast would be completed by 2011. It’s still going through regulatory hearings.
The dearth of new capital has so far not trickled down to oil and gas operations. Greg Stringham, vice-president of the Canadian Association of Petroleum Producers, says domestic capital investment in the sector this year should be in the $64-billion range. That’s down from $67 billion last year, but not catastrophic.
Still, the industry needs some good news to boost investor confidence. “An event like Barack Obama approving the Keystone XL pipeline or the go-ahead for Northern Gateway would maybe help get the psychology changed,” says Hoskins. “Right now, we are bogged down in a lot of negative news and no news.”