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How low can it go?

Potential for opportunistic M&A in Alberta dependent on a number of factors
|Written By Jennifer Brown
How low can it go?
David Dodge is predicting a slow recovery with Alberta weaker than the Canadian average for the rest of 2015-16.

As the economy in Alberta continues to languish, some companies in the resource sector are doing opportunistic prospecting to see if they can strike a deal with a needy seller, but are they ready to bite?

Due to the continuing lower price of oil, there will potentially be more mergers and acquisitions in 2015, says Craig Hoskins, a partner with Norton Rose Fulbright Canada LLP in Calgary. The trick is whether the market has hit bottom to the point where those who are hurting will be willing to sell.

“There’s been a bit of an uptick but it’s still in the mode where companies who aren’t being pushed into coming up with an M&A solution from their creditors or dissident activity don’t want to be the ones doing a deal at the bottom of the market,” he says.

“We have seen situations where the target just says ‘thanks, but no thanks, we can’t see our value being reflected in what you’re offering,’” says Hoskins. “When prices are low it may look like there are buying opportunities but the trick is always having two sides of the table agreeing.”

Adding to the province’s economic woes, Alberta’s new NDP provincial government is also affecting valuations.

“There have been some CEOs who have publicly stated they think it’s hard to do the number crunching on the valuation because of the uncertainty with the new government,” says Hoskins. “Consequently, there will be a big chill on M&A until there is more clarity on what’s going to happen.”

That said, Hoskins says companies taking a longer-term view won’t let that stop them if they see a good deal.

There is also concern in the industry about the royalty review in the oil and gas sector and there has been advocacy to get it through as quickly as possible. The Calgary Chamber of Commerce has asked the government to move quickly on the issue.

“Ultimately, it’s something the industry can digest one way or the other but it’s the uncertainty of waiting for it that’s of concern,” he says.

Last week, Bennett Jones LLP issued its Spring 2015 Economic Outlook, which looks at global and Canadian growth for 2015-17.

When it comes to external conditions, the most important factor facing the province of Alberta, given its very heavy resource dependency particularly on oil, is what’s going to be happening with the price of oil over the next few years, says David Dodge, a senior adviser at Bennett Jones LLP and former governor of the Bank of Canada.

“Obviously no one knows, exactly,” says Dodge. “So you have to look at all the numbers and make an assessment. Our assessment was that we have now, in North America and elsewhere, a lot more potential new sources of supply at prices that are well below the price achieved at the end of 2003, early 2004.”

“With the low price of oil and the very low natural gas price you would think there would be some companies that would start to be pushed to the wall and a number of deals done. We think there is lots of money out there waiting to come in by better financed companies,” says Dodge. “In that scenario we would not be surprised to see some increase in deals being done on the weaker companies being financed.”

On the other hand, if costs continue to be wrung out of non-conventional oil production, whether through automation or driving down wages, or more efficient technology, investment remains reasonable.

Through 2015, Dodge says the price of oil will hover around $60 a barrel and be between $60 and $70 through next year.

“By the time we get to the end of 2017 and further out we’re probably looking at $70 to $90. Over the next two years that would conform with futures prices,” he says.

The second aspect to consider is capacity and how much investment will continue.

Overall, Dodge is predicting a slow recovery with Alberta weaker than the Canadian average for the rest of 2015-16.

“We’re still in the downward adjustment phase to the price collapse that started a year ago, but as you look further out as you get to 2017 things are a bit stronger,” he says.

Fiscal policy, both provincially and federally will also have an impact on any predictions made now.


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