Oil patch should heat up in 2011

Increased optimism in Canada’s oil and gas sector means the number of IPOs and corporate transactions are expected to rise this year, according to Ernst & Young.

This increased activity comes after a relatively slow 2010 that saw fewer but larger deals than 2009, with the value of transactions up 67% from 2009 at $35.7 billion.

“Strategic alliances and joint ventures are on the growth agenda this year as more Canadian companies partner with foreign entities to share risk and increase financial strength and resources,” said Kevan Holroyd, executive director in Ernst & Young’s oil and gas practice. “We’re also seeing confidence return to smaller oil-weighted companies who have been nursing their balance sheets and to financial investors who are re-establishing their interest in the sector.”

In 2010, SINOPEC acquired ConocoPhilips’ Syncrude oil sands operation for $4.65 billion, Total SA acquired certain properties from Suncor for $2.43 billion and Total Canada purchased UTS Energy Corporation for $1.5 billion, among others. The two largest 2010 Canadian IPOs were Athabasca Oil Sands’ $1.35 billion offering and MEG Energy’s $700 million offering.

This year, IPO activity levels are set to rise with upstream and oilfield services likely to remain the engine room of deal flow.

“In oilfield services, we’re seeing some big US companies sitting on large amounts of cash and looking to re-enter the Canadian market,” said Holroyd. “This also rings true for Canadian services companies that have sat on the sidelines over the last few years and are now looking to consolidate and transact.”

Junior oil and gas companies that are natural gas weighted should feature prominently in the 2011 deal mix due to their high debt levels. Natural gas prices will also drive transaction activity as prior hedges expire and squeeze cash flows. Holroyd sees growth ahead for companies in the Western Canadian Sedimentary Basin looking to drive down costs and enhance efficiency using various technologies.

Despite this optimistic outlook, Holroyd says the sector should be prepared for rising costs, scarce labour, budget overruns, and project delays.

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.