Merger activity for energy services companies only the tip of the iceberg:
Ernst & Young
Canada's energy services sector proceeding with caution
"The last 12 to 18 months have been extremely difficult for energy services companies in the Western Canadian Sedimentary Basin. As a result, we've seen very little M&A activity over that time period," said Spil Kousinioris, Partner in Ernst & Young's Mergers and Acquisitions practice in
Despite this, Kousinioris explains that we're now starting to see a renewed, yet cautious, interest in transaction activity in energy services, from both domestic and large multinationals (primarily US companies looking to enter and or enhance their presence in the Canadian marketplace).
Perhaps most importantly, capital markets are starting to open up, with better access to both debt and equity. Private equity participants are also beginning to re-enter the marketplace, looking to deploy capital that was previously being held.
"Over the past year or so, there was a tendency for buyers to wait, thinking valuations would continue to come down," said Kousinioris. "Now these potential acquirers believe that valuations are approaching bottom. In addition, some vendors who were unwilling to transact are now accepting the new pricing paradigm - meaning that the gap between what buyers are willing to spend and what sellers are willing to sell is narrowing, heating up the transactions market."
Notwithstanding the uptick in transaction activity, the report also finds that many companies have no choice but to transact as balance sheets remain under considerable pressure.
Particularly relevant to the experience of Canadian exploration and production companies is the fact that natural gas prices have hit seven-year lows. Historically, oil and gas prices have traded in tandem, but natural gas demand fell during the recession, while production remained relatively resilient and storage reached record highs. Low prices and lingering uncertainty have players in the natural gas market reluctant to transact, unless they're doing so at distressed prices.
These challenges in the natural gas market put energy services companies with a bias towards oil at a competitive advantage in the transactions market.
"With oil prices hovering around
Kousinioris explains that the oil and gas industry has a long and successful history of coping with volatile prices and challenging operating environments. This experience will continue to serve companies well - those who demonstrate the foresight to apply lessons from change will establish their leadership as the new global commodities environment unfolds.
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