More Montney M&A Likely On The Horizon Merger and acquisition (M&A) activity in the prolific Montney play in northeast British Columbia and northwest Alberta has been relatively strong so far this year and more deals are likely in the cards going forward, say industry analysts.
And while there’s still a somewhat sizeable group of junior and intermediate E&Ps in the play, bulk is proving king as five companies — Tourmaline Oil Corp., ARC Resources Ltd., Ovintiv Inc., Canadian Natural Resources Limited and PETRONAS — produce the lion’s share of output, by far at about 75 per cent, of B.C. Montney natural gas supply.
“The recent sales by Athabasca Oil Corporation and Murphy Oil Corporation of a portion of their Montney assets has taken the volume of production traded in the play during the year already past the 2022 total,” said Eoin Coyne, senior M&A analyst with Evaluate Energy.
“The total value of deals in the play during 2023, which currently stands at Canadian $3 billion, is also likely to surpass the $3.4 billion of deals posted in 2022 if the rate of activity continues. It will almost certainly fall short of the consolidation in the play we saw in 2021, though, that brought a total of almost $10 billion of deals and the $4.7 billion ARC Resources Ltd.-Seven Generations Energy Ltd. merger.”
Jeremy McCrea, Calgary-based director of energy research with Raymond James Ltd., expects more deals to be enacted as companies look to bulk-up in an effort to get the investment grade needed to secure long-term LNG off-take agreements.
And that pearl is on top of the Montney’s already strong economics in the current natural gas price environment and the ever-improving well results many players are reporting.
“If you look at the two companies, Tourmaline and ARC, they both have secured LNG-linked natural gas deals through LNG in various areas [including the U.S. Gulf Coast] that have given them access to LNG pricing. And, I think, there are a lot of other operators who are not quite that size that are saying, ‘You know, I’d like to have LNG pricing, too,’” McCrea told the Bulletin.
“At the same time, too, you have the LNG Canada consortium — the group of guys building it — looking and saying, ‘If these guys are able to get LNG Canada pricing, we’re doing this full project here spending how many billions of dollars and we want to get the benefit of the high pricing but we can’t secure enough gas because these five guys control it all and they’re going about it in their own way to get this LNG pricing,’” he added.
“So you kind of set yourself up for a situation where if you are a smaller company, you either would like to probably sell to one of the [big five] operators who need the gas or you want to merge with another smaller operator to become sizeable enough to get that investment grade credit, where you could potentially supply LNG molecules and sign a long-term off-take agreement, with probably some kind of premium built in.”
Regardless of which of the two options a smaller Montney player might/could choose to pursue, McCrea added that, bottom line, “it is beneficial to be bigger.”
Given that, he said it’s likely that there’s some behind the scenes discussions occurring on both the buy and sell side.
“I wouldn’t be surprised if everyone’s looking at who could be their dance partner here. Everyone’s looking at their own inventory and saying, ‘This is really good stuff. We have a lot of inventory and we don’t want to dilute ourselves potentially because we think we have fair value,’” McCrea said.
“The problem is everyone is kind of thinking that. So it’s difficult to get a transaction done. But there is a broader need and recognition that being bigger will likely get you that investment grade credit that allows you better cost of debt and the potential for very lucrative LNG contracts.”
Deloitte also expects more Montney M&A
Andrew Botterill, Deloitte Canada’s national energy and chemicals leader, said he believes there are a “few themes” in play as the Montney M&A market continues to play itself out and evolve.
“I look at it in a few different ways. So, foreign investors in natural gas in Canada is one thing that we’ve seen really build up the Montney in the early days, right? I think the dream of LNG isn’t necessarily dead for foreign investors, but it’s certainly been under cold water — there’s the one big project, of course, and there’s some smaller ones,” he said.
“When I was at LNG2023 in Vancouver, it was really interesting. There’s still a lot of talk and questions about what are the next projects and what are some of the opportunities for Indigenous groups backing different projects?
“So I think with that, I think what we’re going to see with those foreign investors that are still in the Montney, I think they’re going to continue to hold it, have an option and use those volumes to maybe backstop another potential project down the road. Of course, there are those that are already in an LNG project that are going to reap the benefits. I think there’s some really interesting things for those foreign investors.”
On the consolidation front, Botterill believes that more activity is likely to occur but a lot of boxes will need to be checked for deals to be enacted.
“There has been a lot of consolidation in the Montney to date. The trick right now is when you look at the juniors and mid-sized companies that are in there, it’s a profitable play for them. So they’re not really poised to be bought unless somebody comes in at the right premium,” he said.
“Natural gas prices are OK right now, but they’re not robust. But, you could argue that we’re in a relatively stable period where prices have been pretty consistent for the better part of the last little while, which means buyers and seller will be a little closer,” Botterill added.
“I do think there’s going to be more consolidation, but I think it will take kind of the right environment. And consolidation almost always only happens in places where the assets are perfect and the deal is an absolute perfect mix of operational efficiencies and overlapping land and portfolio resilience.”
Given the aforementioned, Botterill said striking a deal that meets the criteria he outlines isn’t a simple task.
“People aren’t looking to add portfolio just to say they’re adding portfolio. They want to feel like they’re adding something better. So it has to be a perfect match,” he said.
“I think there will continue to be deals, but it’s a smaller class of companies [because of previous consolidation] that are doing it than it was 10 years ago. And I think people are really going to be focused on making sure it’s just kind of perfect.”