Following our update during the last quarter of 2016, M&A activity in Canada’s upstream oil and gas sector continued to decline in 2017 and has remained slow during the first quarter of 2018. Globally, there was a strong start to 2017 followed by a significant decline, in terms of both deal count and overall deal value, during the balance of 2017, with a notable increase in deal activity during the first quarter of 2018.

 According to Deloitte’s Oil & Gas Mergers and Acquisitions Report–Yearend 2017, after the increase in deal spend in Q4 2016 and Q1 2017, the rest of 2017 saw a significant decline in upstream M&A spend. Deloitte noted the following themes that emerged during the year: (1) continued portfolio optimization as larger exploration and production (E&P) companies divested non-core acreage to reduce debt levels and focus on core locations and assets, (2) consolidation through larger-scale deals to combine portfolios, and (3) a slowdown in deal activity in the Permian Basin.

 The total value of upstream deals worldwide reached USD 37 billion in the first quarter of 2018 according to Evaluate Energy’s recent report (Evaluate Energy’s Report), suggesting that confidence is returning to the E&P sector. Evaluate Energy’s Report indicated that the number of “significant deals” (i.e. deals with a value of USD 50 million or more) was its highest in the last quarter than any quarter since the initial oil price collapse in mid-2014. This uptick following a slow latter half of 2017 has been attributed to a higher average West Texas Intermediate (WTI) oil price and reduced price volatility. The average WTI oil price during the first quarter of 2018 was USD 62.81, representing the first time the average quarterly WTI price has exceeded USD 60 since the initial price collapse. Further, price volatility was its lowest during the first quarter 2018 than during any quarter since 2004. The industry expects to see continued oil price stability in 2018 given OPEC’s extension of its production cut to the end of the year.

While deal activity has been strong globally in Q1 2018, only one of the top ten upstream deals worldwide took place in Canada with Suncor Energy Inc.’s acquisition of Mocal Energy’s 5% interest in the Syncrude oilsands mining project for USD 750 million. During the same quarter last year, Canada saw USD 24.5 billion of oilsands deals but has only seen USD 1.5 billion during the first quarter of 2018. Deal activity in the United States has taken the lead with an aggregate of USD 18.7 billion in new deals in Q1 2018 representing $411 million more than all other countries combined.

As indicated in CanOils monthly reports for the first quarter of 2018, upstream M&A deal activity continues to fall in Canada as global benchmark oil prices continue to rise. Despite falling deal values, companies continue to list significant asset packages for sale, the majority of which have resulted from companies initiating strategic review processes. Another trend observed since the initial price collapse has been a change in the ownership structure of the Canadian oilsands to bring more of these assets under the control of Canadian companies as international players exit the market.

Canada’s oil and gas industry continues to face challenges relating to insufficient pipeline capacity despite the oil price recovery in the United States and globally. As recently announced, Kinder Morgan’s CAD 7.4 billion Trans Mountain Pipeline Expansion Project, the latest in a long line of maligned proposed Canadian pipeline projects, remains under threat as a result of the BC government’s opposition to the project. Kinder Morgan has announced that it will shelve the project on May 31, 2018, if it does not receive assurances that the project will be able to proceed.

The author would like to thank Jenny Ng, Articling Student, for her assistance in preparing this legal update.

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