Why You Should Examine Debt Levels to Predict Next Oil & Gas M&A Mega Deal

If I had to lay odds on which E&P powerhouse is going to secure the sector’s next major corporate acquisition I’d start by examining their ability to absorb substantial levels of debt while still keeping debt-to-capital ratios in balance.

Sightings of large corporate mergers have been rare during the commodity price downturn. During that time, the number of companies with high debt-to-capital ratios has soared. To help understand which oil giants have the financial clout to pull together a major M&A deal, we’ve shortlisted those with the greatest ability to assume debt and remain “healthy”.

For More: JWN Webinar Series – Review of Recent Transactions: Where is Money Being Spent and Why

Companies with greatest debt capacity as of Q1 2016

By assigning an arbitrary debt-to-capital ratio of 35% as “healthy” you can see which companies are currently able to assume the most extra net debt for a corporate acquisition either in Canada or internationally, and still keep debt levels in check. For example, Tourmaline Oil Corp. (TSX:TOU) would be able to assume Cdn$799 million extra net debt in any acquisition in this model, based on its Q1 2016 balance sheet, before its debt-to-capital ratio exceeded 35%.


Source: Evaluate Energy & CanOils, Q1 2016 Financial Data

Of course, this doesn’t necessarily mean these companies will seek a merger deal. But if they do, they’ll have plenty of capacity for additional debt assumption.

More details on this can be found in the webinar I delivered last week, which can be viewed here.

Why is debt important to consider NOW?

It’s true that the general capital profile of an upstream oil and gas company has, on the whole, changed dramatically since the price downturn began. Looking at U.S. and international companies that report to the SEC as well as every TSX company, we can see a general increase in risk since last year by looking at those debt-to-capital ratios. The findings are intriguing:


Source: JWN Webinar Series – Review of Recent Transactions: Where is Money Being Spent and Why

In 2015, debt was a much greater proportion of their entire capital structure than 2014. That’s hardly a major surprise given the downturn. Some companies even moved into a negative equity position in 2015, as pressures from a longer period of low commodity prices mounted.

Analysis: Biggest corporate deals of the downturn

The highest profile global corporate merger during the downturn was undoubtedly Royal Dutch Shell’s (LSE:RDSA) acquisition of BG Group for around US$81 billion. In Canada, it was Suncor Energy’s (TSX:SU) Cdn$6.6 billion acquisition of Canadian Oil Sands Ltd. (COS) to become the largest stakeholder in the Syncrude project.

Both deals had a lot in common: a large issuance of stock in the acquiring company to the target, as well as the assumption of significant debt.

  • Royal Dutch Shell, as well as 383 UK pence per share, offered 0.4454 B shares in the company to BG, and took on just shy of US$10 billion in debt according to BG’s annual 2015 statements.
  • Suncor issued 0.28 shares in the company to COS in consideration for the acquisition and also assumed Cdn$2.4 billion in debt, according to press announcements.

June 2016 has also seen a couple more deals in Canada that follow this debt assumption pattern.

  • Raging River Exploration Inc. (TSX:RRX) has agreed to acquire Rock Energy Inc. (TSX:RE) in a deal where debt assumption of Cdn$67 million makes up 61% of the total deal consideration.
  • Gear Energy Ltd. (TSX:GXE) will be acquiring Striker Exploration Ltd. (TSX-V:SKX) in a deal worth around Cdn$66 million by issuing 2.325 Gear shares for every Striker share as well as assuming Striker’s Cdn$10 million in debt. (see note 1)

It’s this ability to assume debt and still remain healthy that we think is crucial in identifying those most likely to take on a big corporate merger in the near future.

Both Suncor and Royal Dutch Shell appear in our above list of companies with high debt capacity. Suncor has been linked to more acquisition activity in press reports, while Shell has not – having actually been linked with more asset sales than purchases. In fact, rumours came out of the company that Shell assets were going to hit the market in ten countries worldwide in the not-too-distant future.

Of the other companies listed with greatest debt capacity, many have been selling high-value royalty assets in Canada to bolster their activities with significant cash through the downturn, while the international list includes some of the world’s biggest and most powerful companies.

With companies also having put copious funding into cost controls in recent times and oil prices starting to trend upwards a bit, we might just be around the corner from one of the companies on this list making the world’s next big corporate merger in the E&P sector and we should expect it to include the significant assumption of debt.



1) To value all acquisitions where stock is used as part of the consideration, Evaluate Energy and CanOils always use the day prior share price. Sometimes companies use a deemed stock value or a weighted average price in their press announcements to value the stock, but for comparability reasons, we always use the same method for every deal. This may create some slight discrepancies between our data and announced deal values. Gear valued its acquisition of Striker based on its concurrent bought deal financing, rather than its trading share price, and reported a value of Cdn$63.7 million.

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New Deal for Oil Workers in Norway Averts Strike Action

Offshore oil production in Norway flowed as usual today after strike action by workers was averted.

Norway’s net oil exports in 2015 averaged 1.714 million barrels a day, an increase of 58,000 barrels compared to 2014, according to data from Evaluate Energy and the BP Statistical Review of 2015.

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The majority-state-owned Statoil (Oslo:STL) is by far the country’s biggest oil and gas producer, with 1.23 million boe/d. The second largest producer is ExxonMobil (NYSE:XOM) at 233,000 boe/d followed by Total (Paris:FP) at 227,000 boe/d. Royal Dutch Shell (LSE:RDSA), ConocoPhillips (NYSE:COP), ENI (Milan:ENI), ENGIE (Paris:ENGI), Centrica Plc (LSE:CNA), BP (LSE:BP) and Det Norske (Oslo:DETNOR) are also in the top 10.


Source: Evaluate Energy

About 7,500 employees working in Norway’s offshore oil fields as either drilling personnel or in catering are covered by a new offshore pay settlement, according to the Norwegian Oil and Gas Association in a weekend statement. The Association said the deal was reached between the Norwegian Union of Industry and Energy Workers (Industry Energy), the Norwegian Union of Energy Workers (Safe) and the Norwegian Organization of Managers and Executives.

“These negotiations have been demanding, with a number of different issues which had to be resolved,” said Jan Hodneland, lead negotiator for Norwegian Oil and Gas.

“Given the demanding position which the industry currently finds itself in, it was nevertheless crucial for us to find a solution which ensured that a strike could be avoided.”

The agreement includes a decision to appoint one or more committees during the period covered by the 2016-2018 settlement, “to assess issues related to time spent offshore, as well as changes to the work plan, workplace and work periods.” This is intended to tackle cost challenges faced by companies covered by the offshore agreements, said the Association. “The expectation is that such mutually binding committee discussions will help to strengthen the competitiveness of the Norwegian continental shelf.”

Need to keep in touch with the oil and gas industry in any country worldwide? The Evaluate Energy country subscription helps you do just that.

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EU Shock Wave: The Latest from London as Market Upheaval Continues

Enormous political and economic upheaval continued this morning in the aftermath of the UK’s historic decision to leave the European Union.

Stock traders and commentators struggled to keep pace with changing events in London, amid political interventions to calm markets on the one hand, and talk of political coups on the other.

Keep on top of all things “Brexit” with the Evaluate Energy Country Analysis Subscription

At the start of Monday trading, chancellor George Osborne sought to reassure markets that had been sent into a tailspin on Friday after the shock EU referendum decision.

“The Bank of England stands ready to provide GBP250 billion of funds through its normal facilities to continue to support banks and the smooth functioning of markets,” said Osborne, himself under enormous pressure having been a key figure in the failed campaign to remain within the EU.

“It will not be plain sailing in the days ahead. But let me be clear. You should not underestimate our resolve. We were prepared for the unexpected and we are equipped for whatever happens.

“We are determined that unlike eight years ago Britain’s financial system will help our country deal with any shocks and dampen them, not contribute to those shocks and make them worse.”

As of 4am MDT, the pound continued to struggle against the U.S. dollar. It was down to GBP1.3221. Among the banks, shares in Barclays and RBS were also down significantly. Brent oil was up 5 cents, to US$48.46.

For the latest market update visit: http://www.bbc.co.uk/news/business-36636853

For an overview of the initial reactions to the UK Brexit vote, click here for Friday’s article.

The UK also witnessed today tremendous upheaval within the Labour Party, the official opposition to outgoing Prime Minister David Cameron’s Conservative Party.

A fleet of Labour shadow cabinet and shadow ministers have resigned their positions in protest at the leadership of Jeremy Corbyn, in what has been described by many as an attempted “political coup” to oust the left-wing leader.  Corbyn announced this morning a new shadow cabinet. Further developments are anticipated within the next 48 hours.

And within the nation at large, there continues to be widespread dismay among the 48% of the UK that voted to remain within the EU. While London and Scotland voted resoundingly to remain, large parts of the rest of the UK voted to leave, a choice that has largely been characterized as a vote against immigration and a protest at governance from Brussels.

With Prime Minister Cameron announcing his decision last Friday to resign by the fall, debate is intensifying over who should take his place. Boris Johnson, the former Mayor of London and the chief figurehead of the successful “Leave” campaign, is the front-runner.

Before the vote took place last week, chief executives at three of the top four UK oil and gas producers publicly urged voters to remain within the European Union. Among them were CEOs at Anglo-Dutch Royal Dutch Shell, BP Plc. and France’s Total, who featured in media outlets in a list of prominent pro-EU business leaders, together with executives from Centrica plc and smaller producers active in the UK such as EnQuest plc, ENGIE, MOL and BHP Billiton.

According to data from Evaluate Energy, the energy executives who declared in favour of staying control approximately 510,000 boe/d of UK North Sea production.


Source: Evaluate Energy

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Oil Industry and Markets React to UK Vote to Leave European Union

Markets and the oil and gas industry reacted this morning after the United Kingdom voted to leave the European Union in a historic decision that triggered Prime Minister David Cameron to resign.

Keep on top of all things “Brexit” with the Evaluate Energy Country Analysis Subscription

“Leave” campaigners polled 52% in a vote that rebutted economic and political arguments for staying within the EU provided by Prime Minister Cameron and other prominent “Remain” supporters. Voting was heavily split regionally – with a majority of voters in London and Scotland expressing a desire to remain within Europe.

Canadian Mark Carney, governor of the Bank of England, said today the UK could expect market volatility as it begins the process of renegotiating trade agreements with the EU and wider world.

“The Treasury and the Bank of England have engaged in extensive contingency planning and the chancellor and I have been in close contact, including through the night and this morning,” he said in a statement.

“The Bank will not hesitate to take additional measures as required as those markets adjust and the UK economy moves forward. These adjustments will be supported by a resilient UK financial system – one that the Bank of England has consistently strengthened over the last seven years. The capital requirements of our largest banks are now ten times higher than before the crisis. The Bank of England has stress tested them against scenarios more severe than the country currently faces.”

Read Mark Carney’s full statement here: http://www.bbc.co.uk/news/business-36618560

The expected volatility was seen as markets opened this morning. The FTSE fell 8% and the value of the UK pound dropped while the price of Brent oil fell by 5.2%. Both the FTSE and Brent regained some ground in later morning UK trading.

Prime Minister Cameron had staked his political future on the outcome of the referendum. He announced his intention to resign in the hours that followed the “Brexit” result, as well as providing a sense of the timing for new leadership to take his place by this fall.

Oil & Gas UK, the leading representatives for the UK’s offshore oil and gas industry, this morning hoped that all those involved will now come together and “work constructively” to make the EU transition as smooth as possible.

“We ask that the UK Government clearly outlines the process which will follow to minimize any potential period of uncertainty. The UK oil and gas industry is at a critical juncture and we need to ensure the UK Continental Shelf continues to attract investment and be seen as a great place to do business.”

The UK Government identifies security of domestic energy supply as a key part of the UK’s energy plan. It has been exploring alternative sources of domestic energy, including the creation of a shale gas sector. The UK became a net importer of oil in 2006, of gas in 2004 and for a combination of oil and gas in BOE in 2005.

Earlier this week, chief executives at three of the top four UK oil and gas producers publicly urged voters to remain within the European Union. Among them were CEOs at Anglo-Dutch Royal Dutch Shell, BP Plc. and France’s Total, who featured in media outlets in a list of prominent pro-EU business leaders, together with executives from Centrica plc and smaller producers active in the UK such as EnQuest plc, ENGIE, MOL and BHP Billiton.

According to data from Evaluate Energy, the energy executives who declared in favour of staying control approximately 510,000 boe/d of UK North Sea production.


Source: Evaluate Energy

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Energy CEOs back UK to “Remain” in Europe

Chief executives at three of the top four UK oil and gas producers have publicly backed the campaign to keep the UK within the European Union.

In a decision that could have major global trading ramifications, UK citizens began voting earlier today in the historic referendum to determine whether they want to remain part of the EU. Voting closes at 10pm UK time (5pm EDT, 3pm MDT)

CEOs at Anglo-Dutch Royal Dutch Shell, BP Plc. and France’s Total showed their public support for the Remain campaign earlier this week. They featured in media outlets in a list of 1,280 prominent business leaders urging the British public not to “Brexit”, together with executives from Centrica plc and smaller producers active in the UK such as EnQuest plc, ENGIE, MOL and BHP Billiton. Combined, the energy executives on the list of Remain supporters control approximately 510,000 boe/d of UK North Sea production.

Speculation has been rife from campaigners on both sides of the EU debate over the geopolitical and economic consequences should the UK “Brexit.” The value of the GBP pound has fluctuated significantly in recent times on the back of referendum campaign messaging (much of it negative in nature), as well as speculation over the economy post-referendum and opinion polls showing how tight the vote could be.


Source: Evaluate Energy


  • Royal Dutch Shell reported 103,000 boe/d itself and then assumed 97,000 boe/d in its acquisition of BG Group Plc, which closed post-year end, resulting in its estimated total of 200,000 boe/d in the above chart.
  • “Other” in the chart includes three companies: France’s ENGIE (formerly GDF Suez), Hungary’s MOL (both 5,000 boe/d) and Australia’s BHP Billiton (3,000 boe/d)
  • China’s CNOOC Ltd., the second biggest producer on the list after its 2013 acquisition of Nexen Inc., was not represented in the list of 1280 companies, but it’s stance on the UK referendum is unknown.

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Canadian Upstream M&A Reaches Cdn$880 Million in May 2016

Data from CanOils’ latest M&A report shows that the total value of announced M&A deals in the Canadian E&P sector totalled Cdn$880 million in May 2016. The report is available for download now. Although this value falls short of the average monthly deal aggregate of Cdn$1.5 billion since the price downturn began, what bodes well is that this month’s total is spread across a few deals worth over Cdn$50 million as opposed to previous months where one large deal often dominated the total. Notable deals this month include Husky Energy Inc.’s (TSX:HSE) disposal of Saskatchewan assets to Whitecap Resources Inc. (TSX:WCP) and royalty assets to Freehold Royalties Ltd. (TSX:FRU) and Spartan Energy Corp.’s (TSX-V:SPE) acquisition of privately-held Wyatt Oil + Gas Inc..

This new M&A report delves into every deal story involving a Canadian oil and gas company in May 2016, using data from the entire CanOils database.


Source: CanOils M&A Database

Husky Makes Two Significant Asset Sales

Husky Energy Inc. made the most headlines in the Canadian M&A space this month, agreeing the two biggest deals of the month. Whitecap Resources Inc. will acquire assets in southeast Saskatchewan for Cdn$595 million, while Freehold Royalties has completed the Cdn$165 million acquisition of some royalty production in Saskatchewan and the Deep Basin.

Map of Husky Energy Wells and Land being Acquired by Whitecap Resources


Source: CanOils AssetsClick Here for Map Legend

Both of these deals are analysed in detail in the new CanOils monthly M&A review for May 2016.

Also included in the report:

  • Whitecap’s recent deal history and detailed analysis of the company’s equity financings
  • Arsenal Energy agrees to sell its properties  in the United States
  • Murphy Oil completes joint venture arrangement with Athabasca Oil Corp.
  • 15,000 boe/d of domestic Canadian production put up for sale in May, including Connacher Oil & Gas’ SAGD operations
  • A round up of all the deal stories impacting Canada’s oil and gas industry in May


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The Cost of Producing Oil & Gas in Canada

CanOils and JWN are pleased to announce the release of their latest, jointly-produced report that looks at the full supply cost of producing oil and gas in Canada. The report looks at the cost structures of TSX-listed intermediate, junior and international producers in 2014 and 2015 and is available to download now at this link: http://www.jwnenergy.com/reports-data/


Inside this 50-page report:

  • In-depth analysis of intermediate, junior and international TSX-listed companies’ full supply costs
  • Operating, transportation, G&A, F&D, interest and royalty expenses per barrel metric analysis across all three peer groups
  • Insight into how costs have changed year on year and the savings made during the downturn
  • A detailed look into the full supply costs for the Montney and Marcellus shale plays

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Canadian Upstream M&A Tops Cdn$1bn in April 2016

In April 2016, the total monthly value of M&A deals in the Canadian E&P sector was over Cdn$1 billion for the first time in 2016, according to analysis in CanOils latest monthly M&A report

This is almost entirely due to Suncor Energy Inc. (TSX:SU) agreeing the biggest deal of the year so far to further increase its stake in the Syncrude oilsands mine by an extra 5% for Cdn$937 million. Suncor, of course, had already completed the Cdn$6.6 billion acquisition of fellow Syncrude partner Canadian Oil Sands Ltd., which was the biggest Canadian E&P deal to be announced in 2015.

Aside from Suncor however, the Canadian E&P space saw a continuing lack of deals in April 2016. In fact, only three new deals were announced for Canadian E&P assets all month that had a value of over Cdn$1 million. The low price environment is still holding back activity, with companies struggling to find buyers for assets they have put up for sale.


Inside this month’s report: 

  • Suncor Energy further increases its stake in Syncrude in Cdn$937 million deal
  • Syncrude Project deal and historic implied value analysis
  • Penn West Petroleum completes its Slave Point asset sale
  • Parex Resources agrees farm-in deals with Colombia’s Ecopetrol
  • Only 2,500 boe/d of domestic Canadian production put up for sale
  • A round up of all the deal stories impacting Canada’s oil and gas industry in April

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Cdn$347 Million of E&P Deals in Canada in March 2016

Analysis in CanOils’ new report “Upstream Oil & Gas M&A in Canada Reaches Cdn$347 Million in March 2016” shows that while March 2016 saw the lowest monthly deal value for domestic Canadian E&P assets since mid-2015, there was a distinct increase in M&A activity involving internationally-focused Canadian companies.

Domestic deal value has been low since 2016 began; the combined total values of newly announced domestic Canadian E&P deals in January, February and March 2016 do not reach the total of Cdn$1.35 billion of December 2015 alone.

Download the CanOils review of March 2016’s most significant deals involving TSX and TSX-V listed E&P companies here.


Source: CanOils M&A Review March 2016 – “Upstream Oil & Gas M&A in Canada Reaches Cdn$347 Million in March 2016

Highlights – March 2016

  • The biggest deal on the domestic front in Canada from March saw Penn West Petroleum Ltd. (TSX:PWT) continue its divestiture programme with the Cdn$148 million sale of its Slave Point assets. The company also agreed Cdn80 million-worth of non-core asset sales in March 2016, bringing its total asset sales since January 2015 up to over Cdn$1 billion.
  • Outside of Canada, there was more deal activity in March 2016. The biggest deal involving a Canadian-listed company in March 2016 saw a group of Chinese investors agree to acquire Bankers Petroleum Ltd. (TSX:BNP) for Cdn$638 million including debt. The company is mainly focused on the Albanian E&P industry and produces over 18,000 boe/d.
  • In all, Canadian-listed companies were involved in M&A-related stories in 13 different countries around the world this month.
  • Over 23,000 boe/d was put up for sale this month, including assets owned by Harvest Operations Corp., NEP Canada ULC and Questfire Energy Corp. (TSX-V:Q.A)

Full details on all of the biggest deals and M&A stories, including all Canadian E&P assets put up for sale in March, detailed analysis on the Penn West Petroleum asset sales and the Chinese acquisition of Bankers Petroleum, are provided in the CanOils M&A Review for March 2016.


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Private Companies Dominate U.S. Upstream M&A in Q1 2016

New analysis in Evaluate Energy’s M&A Review for Q1 2016 shows that privately held companies had a huge impact on the United States’ upstream oil and gas industry in recent months. While the biggest deal in the U.S. involved two public companies – Dominion Resources Inc. (NYSE:D) agreed to acquire Questar Corp. (NYSE:STR) for US$6 billion – the next biggest deals all involved a public company selling assets to a privately-held acquirer. In total, U.S.-based private companies were the acquirers in US$3.5 billion worth of asset and corporate deals in the U.S. during Q1 2016, a figure that also stands out because the total value of newly announced E&P deals by all companies worldwide was only US$18.5 billion.


The largest deal involving a private acquirer for E&P assets in the United States during Q1 2016 was a US$910 million sale by WPX Energy Inc. (NYSE:WPX). To help reduce its substantial debt position, which stood at around US$3.1 billion at the end of 2015, the company sold its Piceance Basin assets in Colorado in an all-cash deal to Terra Energy Partners LLC. The assets currently produce around 500 mmcfe/d and cover 200,000 net acres. The sale will leave WPX with its positions in the Delaware Basin, the Williston Basin and the San Juan Basin to focus on moving forwards. The company also made a significant US$309 million gathering system midstream sale in the San Juan Basin this quarter to further bolster its debt-reduction strategy. Terra Energy Partners LLC, the acquirer of WPX’s Piceance Basin assets, is a private exploration and production company formed to pursue the acquisition and development of large, long-life producing oil and gas assets in North America. It is funded by equity commitments from Kayne Private Energy Income Fund and Warburg Pincus.

Another large private company deal involved Dallas-based Covey Park Energy LLC, which announced a US$420 million acquisition of EP Energy Corp.’s (NYSE:EPE) Haynesville and Bossier shale gas assets that are located primarily in Louisiana. EP Energy recorded nearly US$5 billion in long term debt in its 2015 annual results and this deal presumably is targeted at reducing that figure. Other multi-million deals by private acquirers in the U.S. saw Chesapeake Energy Inc. (NYSE:CHK), Concho Resources Inc. (NYSE:CXO) and ConocoPhillips (NYSE:COP), among others, sell off assets in Q1 2016. More details on the largest private company deals in the United States, as well as a full review of the biggest and most significant deals in the U.S., Canada and around the world, can be found in Evaluate Energy’s review of global E&P deals for Q1 2016.

Top 5 Upstream M&A Deals in the U.S. During Q1 2016 Involving a Privately-Held Acquirer

Source: Evaluate Energy Report: Global Upstream Oil & Gas M&A Reaches Just $18.5 billion in Q1 2016″ 


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