How to make the most of Canada’s energy M&A prospects: E&Y
(As originally published in the Financial Post, 19 March 2012)
By Kevan Holroyd, Associate Partner, Oil and Gas Transactions Practice, EY
Buy, sell, partner or stay the course? That’s the question on everyone’s minds in Canada’s oil and gas sector this year. Challenging times and waves of uncertainty influenced the sector throughout 2011, but the stakes are changing.
The economic uncertainties that dampened transactions, partnerships and new business relationships across the Canadian sector are becoming second nature. Despite deal value dropping by 60% and the total number of deals declining from 202 in 2010 to just 138 in 2011, companies are positioning themselves to get back in the game.
Now, with continued robust oil and liquids prices, stronger balance sheets and improved access to credit, 2012 could well prove to be one of the most dynamic and transformational years for companies throughout Canada’s energy sector.
Players are adopting a longer-term vision and seeking out transactions that are strategically congruent, offering value on both sides of the table and leveraging each company’s strengths. But even the best laid plans can fall flat without proactive management and oversight of all phases of the transaction process. According to EY’s new report, Making the most of transaction opportunities in Canada’s oil and gas sector: a practical guide to doing deals, getting a transaction right starts by focusing on the following key areas:
- Develop a proactive identification process that efficiently and effectively evaluates whether a transaction opportunity is pursued or discarded.
- Manage strategic supplier and customer relationships by ensuring an effective transition, retention and leverage model is in place.
- Create a plan to identify and recruit or retain key personnel to maintain technical competency, commercial relationships and business continuity in order to meet the business objectives and maximize value in any given transaction.
- Align corporate culture between both parties by bridging the knowledge gap and clearly communicating desired strategic objectives.
- Establish controls to mitigate interim operating risks throughout the transaction process by implementing structures and processes that leverage the contributions of both companies and support revenue enhancement and cost control.
- Leverage margins through targeted cost reductions, implementing shared services and increasing return on investment through rationalization of core versus non-core businesses, contracts and potential outsourcing opportunities.
- Track finances and operations on an interim basis while designing, implementing and migrating to a long-term reporting system.
- Put in place a well-thought-out transitional services agreement that includes addressing key management retention issues.
While high oil and liquid prices are setting the stage for an exciting year of transactions in Canada, opportunities will vary depending on a company’s asset base and economic reality. That’s why evaluating your company’s capital agenda and related strengths and weaknesses before pursuing a transaction is imperative. It will almost exclusively determine whether you’ll become a buyer, seller or strategic partner, or whether you should retrench, be prudent and stay the course.
Canadian companies with an asset base focused on oil or wet gas plays are more likely to see transaction opportunities come their way. The current environment also bodes well for services and infrastructure companies that support Canada’s oil and gas sector. We’re already seeing the effects of this in the market, with US engineering company URS Corp.’s purchase of Canadian oilfield services company Flint Energy Services, and Pembina Pipeline Corp.’s acquisition of Provident Energy Ltd. Interest in Canada’s oil and gas sector has always been strong, but with the current transaction environment companies can expect an influx of interest from large US companies, foreign buyers and private equity investors who view Canada’s energy sector as a viable business opportunity.
Those looking to sell can get the most out of their transaction by uncovering undiscovered value, preparing management to respond to issues and challenges that the buyer may realize, and discovering the divestiture’s impact on the retained business. Having a strong project management structure in place ensures everyone understands the transaction process and can contribute effectively.
If your company’s capital agenda supports buying this year, you can reduce risks and optimize opportunities by reviewing planning, budgeting and forecasting processes to better model uncertainty, alternative scenarios and capital adequacy.
For many companies not suited to buy or sell, strategic alliances and joint ventures with either domestic or foreign investors can deliver real value and growth rewards to all stakeholders. Mitsubishi and Encana’s partnership agreement for the development of Cutbank Ridge in BC is just the beginning of a series of alliances we expect to see in 2012. Whether by sharing non-strategic services or partnering to access resources, leverage technology or optimize the supply chain, strategic alliances can support accelerated growth.
Whatever your growth agenda dictates this year, one thing is certain: understanding your company’s relative place on the capital agenda will be critical to ensuring your transaction stands the test of time.
Kevan Holroyd is an Associate Partner in EY’s oil and gas transactions practice. He is based in Calgary.