Rebound under way for Canadian M&A activity
After falling to a 10-year low in 2013, merger and acquisition activity for small, Canadian exploration and production (E&P) companies rebounded in the first part of 2014.
Research by IHS shows seven corporate E&P transactions worth more than US $10 million each were announced in Canada through early June, compared to 11 transactions announced in the full-year 2013. The total value of corporate E&P transactions announced so-far had exceeded $2.5 billion, after falling to roughly $2.0 billion in 2013.
IHS unveiled the data in a research note issued on Jun. 6.
The consolidation trend among small Canadian E&Ps was expected to continue. IHS said this year the Canadian M&A market is on track for more than 15 corporate acquisitions worth a total estimated corporate deal value of more than $6 billion.
"The Canadian marketplace for E&P companies holding high-quality unconventional and light-oil opportunities is red hot," said Anna Wuchek, principal analyst at IHS Energy.
According to the report, M&A activity is driven by buyers seeking to acquire lucrative, oil-rich assets in key Canadian plays and sellers seeking to improve profitability and generate cash flow to fund new investments.
"Buyers targeting oil-weighted companies can expect to pay twice as much on a proved-reserves basis compared with companies pursuing takeovers of Canadian gas-weighted firms," Wuchek said.
Most consolidation activity is being led by Canadian E&Ps, but the last 18 months have also seen the entrance of Chinese and Polish buyers to the Canadian M&A market, Wuchek said.
In September 2013, a subsidiary of PKN Orlen SA, of Poland, agreed to purchase TriOil Resources Ltd., of Canada, for a total transaction value of C$252.3 million. TriOil held assets in the unconventional Cardium, Lochend, and Dunvegan light-oil developments in Alberta.
Unconventional and light oil opportunities, such as the emerging Cardium and Viking plays in Alberta and Saskatchewan, were highlighted as offering compelling opportunities for buyers. IHS expects consolidation in these plays is will increase as they mature.
Consolidation activity could also rise among small-to-midsized Canadian companies with large acreage positions in the Duvernay shale in Alberta and among junior E&Ps with conventional, gas-weighted assets and depressed market valuations.
Going forward, Wuchek expects E&P companies with well-performing stock will be motivated to use the stock as currency to purchase conventional, gas-weighted junior E&Ps with depressed market valuations. "Doing so will enable them to achieve prime acreage consolidation in unconventional opportunities, and to achieve cost reduction and operational synergies through infrastructure optimization," she said.
Encana improves IP rates in Montney shale
Encana Corp. has increased initial production rates by about 75% in its Montney shale drilling program.
The company is using a revised well design in the Cutback Ridge area in northeast British Columbia that involves longer laterals and more intense stimulation.
Michael McAllister, chief operating officer of Encana, said the company significantly increased fracture intensity, cut inner frac spacing to 25 meters from 50 meters, and kept the sand concentration the same.
"It's somewhat of a game changer for us in the Montney," McAllister told analysts during a call to discuss first-quarter results.
Encana is partnered with a subsidiary of Mitsubishi Corp., of Japan, in parts of the Cutback Ridge area.
Encana holds nearly 600,000 net acres in the Montney shale, which spans northeast British Columbia and northwest Alberta. This year, plans call for accelerating development of the oil and liquids-rich portions of the formation. Eight rigs are expected to drill 80-85 net wells.