Oil surge gives private equity a window out of stranded Canadian energy companies

(Reuters) – A slew of privately-backed oil and gas companies have been put up for sale in Canada’s energy patch as rising crude prices prompt buyout stores to exit and release some of their capital which was stuck much longer than originally expected.

FILE PHOTO: A TORC Oil & Gas pump cylinder is seen near Granum, Alberta, Canada, May 6, 2020. REUTERS / Todd Korol

Sales provide attractive opportunities for small and mid-cap Canadian oil companies to grow their businesses, improve their chances of accessing debt and capital markets, and reduce costs through economies of scale.

An industry source, currently on the lookout for takeover targets, said at least a dozen privately-backed Canadian oil and gas assets ranging from C $ 50 million (39.5 million) to 500 million Canadian dollars are for sale.

These include Corex Resources, backed by Azimuth Capital, Manitoba’s second-largest oil producer, which could be valued at around C $ 300 million, sources told Reuters. Another Azimut portfolio company, TimberRock, and Fire Sky Energy, backed by PFM Capital, are also looking for buyers, according to sales documents seen by Reuters.

The rise in the number of smaller companies for sale underscores how high oil prices have created the best environment in more than seven years for private equity firms to benefit from Canadian energy investments.

After several lean years, smaller companies have cut costs and strengthened their balance sheets, making them more attractive acquisition targets, said Scott Barron, head of Calgary investment banking at TD Securities.

“Everyone wants to see more size, more scale, more safety. This is one of the reasons we are seeing more consolidation, ”said Barron.

The buyout companies have sold about $ 2.6 billion of Canadian oil and gas producers so far this year, the highest level since at least 2010, according to IHS Markit. These exits follow a wave of consolidation among Canadian companies after many of the world’s major oil companies have pulled out of the Canadian energy sector in the past five years.

State-owned companies have been the buyers of all but one of the largest energy deals this year involving a Canadian private seller, according to a review of data from Refinitiv. Major transactions included the takeover of Black Swan Energy Ltd by Tourmaline Oil for C $ 1.1 billion in June and the purchase of Velvet Energy by Spartan Delta Corp for C $ 743 million in July.



The oil capital of Canada, Calgary, was once a breeding ground for junior oil and gas companies. Experienced management teams would lease the rights to drill to a promising area and secure financial backing from private equity firms, which typically expected new junior companies to prove their reserves and go public within five years, realizing thus a healthy profit.

But the 2014-15 global oil price crash put Canada’s energy sector out of favor with international investors, and a prolonged downturn forced many private equity firms to hold on to their investments.

“Due to low oil prices, they had no options for monetization or exit routes over the past few years,” said Christopher Sheehan, director of mergers and acquisitions research at IHS Markit.

The rollout of vaccines to fight the pandemic and supply restrictions by the world’s major oil-producing countries have pushed U.S. crude to its highest level since 2014, giving buyout companies a long-awaited exit window and making banks more willing to lend.

“Oil at $ 70 (a barrel) means banks are now breathing much easier, not as quickly to put pressure on some companies – access to capital is much stronger than it has been in years “said David Phung, Chief Financial Officer of Greenfire. Acquisition Corp.

Greenfire purchased the Canadian JACOS unit from Japan Petroleum Exploration Co in July, taking over the Hangingstone oil sands project in northern Alberta.

“I don’t think we’re still at the point where there’s a flood, but still $ 20 a barrel (up) and we could be there really quickly,” Phung said.

($ 1 = 1.2668 Canadian dollars)

Reporting by Shariq Khan in Bengaluru and Nia Williams in Calgary; Editing by Denny Thomas and Matthew Lewis

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