Crude Observations

Back to Work! (part deux)

Ah, the week after Labour Day. It’s those heady days when everyone (and I mean EVERYONE) is back from holidays, school buses are out in force, traffic is a complete and unmitigated nightmare disaster and, in theory, people get back to work.


As a mid-market M&A boutique working in a seasonal and cyclical sector we look forward to the post Labour Day period as one of typically increasing deal activity.


There are a number of reasons for this, some idiosyncratically Western Canadian (we like to vacation in the summer – a lot) and some driven by an oil patch that sees the lion’s share of its field activity happen in the last four and first four months of the calendar year so this is the time for everyone to get back at it, so to speak.


It is also typically a time of optimism for both sellers and acquirers as producer capex budgets get set, winter work is planned and measure of certainty returns to the market. As stated last week, it is likely that 2018 will see a bit of a pull-back in capex budgets given the stubbornness of commodity prices, however we nonetheless believe that we are in the midst of a long and slow recovery on the upstream side of the commodity complex.


On the flip side, the infrastructure part of the energy world is in full swing. Notwithstanding the shelving of the Pacific Northwest LNG project, there are billions of dollars in midstream/downstream infrastructure projects being pursued, both new build and maintenance related.


Bottom line? Companies in the up/mid and downstream sectors are spending money and when money is flowing, M&A isn’t far behind.


In our view, the 2012-2013 M&A cycle was particularly robust in the energy services space, the wheels fell off through 2014 leading to 2015 and 2016 being fairly slim pickings. Towards the end of 2016, deal flow started to pick up with the upstream recovery, but lagged because the service sector didn’t have the “pricing power” yet to make significant (or any) money. Fast forward to 2017 and we have pockets of significant activity in industry verticals and specific geographies that suggest consolidation may start to accelerate as well as a vendor demographic that is finally able to breathe easier at night and see value in their company. It’s going to be a long haul but we feel that we are entering what could be a fairly decent M&A cycle in Canada and what has the potential to be a bit of a super-cycle in the United States, particularly with respect to energy infrastructure and land-based drilling and completions.


Sectors that we think are of particular interest in this early part of the consolidation cycle include anything related to completions as this appears to be where the greatest shortage of labour and equipment is, if you can believe a sector that has shed at least 100,000 jobs can actually have a shortage of labour. Included in this: fracking businesses, water and fluid transportation logistics companies (trucking), companies providing services around the sourcing and provision of sand, downhole tools, production testing, cementing, surface rental businesses and the like.


On the drilling side, there is still a lot of equipment available so that will need to wait a bit for that recovery.


On the service side, the service rig sector is likely to be in doldrums for a while, but there will be pockets of interest (not sure which, but I have been waiting for the service rig sector to be in play and I’m not giving up).


Turning to the infrastructure space, the activity levels here are likely to continue to recover and many companies that do well-site tie-ins, pipeline and facility construction and survived the downturn intact with quality people will start to hit the radar screen of strategic acquirers who may find themselves labour or client starved.


Travelling downstream is where there is likely to be significant activity as the announced major projects such as the Trans Mountain expansion, the Coastal Gas Link and Line 3 heat up, the demand for equipment and manpower is going be intense. Some of you may have noted the announcement by Kinder Morgan of the contractors it has selected for the various legs of the expansion – the real M&A opportunity is with all the sub-contractors and peripheral suppliers and service providers. Add in Keystone XL and there may not be enough people and equipment in Western Canada to do all these projects and any other mid or downstream capex planned by the dozen or so significant players, never mind the ho-hum regular everyday inspection, maintenance and turnaround requirements of an energy sector that produces, processes and transports 4.2 million barrels of oil and 15 Bcf of natural gas a day.


One trend that we believe is going to be more prominent as this cycle unfolds is outbound M&A activity from Canada to the US. The reality is that the U.S. market has a very strong gravitational pull for Canadian companies and we have a lot of technology and solutions that are not yet widespread in places like Texas. With the capex in the U.S. so large and the drilling season being 24/7/365, it is hard for Canadian firms to ignore especially when they get the transformational benefit of growing U.S. based cash flow which could open doors to higher purchase price multiples in the long run (no promises BTW).


On the flip side, perhaps those overly aggressive multiples in the United States will serve as a wake-up call to inbound capital to the potential of the Canadian market where companies tend to be less itinerant in terms of staffing, have very deep roots in the community and, notwithstanding recent dollar rallies, are still available at a significant discount to similar U.S. firms. What you may give up in immediate growth prospects you make up for in a more realistic multiple and steadier cash flows.


Look, I know I am a hopeless shill for Canada as an M&A destination, but the reality is that there is great opportunity and great companies on both sides of the border. At the end of the day, a recovered and robust M&A market is a good thing all around.


As a final point, we are often asked when is the “right time” to sell, to which we answer, there is no “right time”, only “time” and that time is when somebody wants to buy you. It is never a bad move to take chips of the table when the opportunity presents itself, given how volatile our industry can be. Cash is king and the only way an entrepreneur can secure his future is to take that opportunity when it is offered. But ultimately, when all is said and done, the only bad time to sell is when you “have to sell”.


Prices as at September 8, 2017 (September 1, 2017)

  • The price of oil rose during the week as refineries came back online post Harvey before sliding on Friday on fears regarding Irma. Data this weak included the effect of Harvey so it was a bit skewed
    • Storage posted a large increase
    • Production fell significantly
    • The rig count in the US appears to have plateaued
  • Natural gas also fell during the week on fears regarding demand disruptions.


  • WTI Crude: $47.58 ($47.35)
  • Nymex Gas: $2.897 ($3.065)
  • US/Canadian Dollar: $0.8235 ($ 0.8069)


  • As at September 1, 2017, US crude oil supplies were at 462.4 million barrels, a increase of 4.6 million barrels from the previous week and 38.3 million barrels below last year.
    • The number of days oil supply in storage was 27.5 behind last year’s 30.5.
    • Production was down for the week by 749,000 barrels a day at 8.781 million barrels per day. Production last year at the same time was 8.458 million barrels per day. The change in production this week came from an increase in Alaska deliveries and dramatically lower Lower 48 production.
    • Imports fell from 7.905 million barrels a day to 7.083 compared to 7.069 million barrels per day last year.
    • Refinery inputs were down during the week at 14.472 million barrels a day
  • As at September 1, 2017, US natural gas in storage was 3.220 billion cubic feet (Bcf), which is marginally above the 5-year average and about 6% less than last year’s level, following an implied net injection of 65 Bcf during the report week.
    • Overall U.S. natural gas consumption was flat during the week
    • Production for the week was up 2%. Imports from Canada were down 1% compared to the week before. Exports to Mexico were up 6%.
    • LNG exports totalled 3.8 Bcf.
  • As of September 5 the Canadian rig count was 197 (29% utilization), 132 Alberta (31%), 26 BC (37%), 34 Saskatchewan (30%), 3 Manitoba (33%)). Utilization for the same period last year was just above 15%.
  • US Onshore Oil rig count at September 8 was at 756, 3 less than week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States was up 4 at 187.
    • Peak rig count before the downturn was November 11, 2014 at 356 (note the actual peak gas rig count was 1,606 on August 29, 2008)
  • Offshore rig count was unchanged at 16
    • Offshore rig count at January 1, 2015 was 55
  • US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 56%/44%


  • Wildfires continue to rage in British Columbia. Please consider a Red Cross donation if you can. It’s simple, easy and it helps
  • Hurricane Harvey dropped more than 4 feet of rain across Southern Texas. Please consider a donation in support of rebuilding efforts.
  • Hurricane Irma is currently bearing down on Florida after flattening a number of Carribean isalnds. See above.
  • And, an earthquake in Mexico.
  • TransCanada has asked the NEB to suspend its Energy East review for 30 days to TransCanada can assess the cost and timing impact of the recent changes to the evaluation process. Well done Federal Liberals. You have at once supported and undercut pipelines. One hand clapping.
  • After receiving confirmation it has satisfied all 157 conditions on its Burnaby terminal, Kinder Morgan announced it has selected contractors for the six major legs of its TransMoutain project. Kudos to them for carrying on with business as usual.
  • A new technology that transforms heavy crude oil into pill-sized pellets was announced. Before anyone gets too excited that pipeline controversy has been solved forever, let’s try and commercialize it in a scale bigger than 1 barrel per day.
  • NFL Season started yesterday. Woohoo! My superbowl pick is the Oakland Raiders over the Seattle Seahawks. But my real sentimental pick is Giants/Patriots 3, the Eli(te) Trifecta
  • Trump Watch: It’s been natural disaster week for Trump, as the nation deals with fall-out from Harvey and the upcoming Irma (ugh, these names). Plus North Korea detonated a watermelon underground or something. And, he announced he was repealing DACA, the “Dreamers” act which had given amnesty to about 800,000 childreon of illegal immigrants currently living in the U.S. So, far be it for me to talk policy, but if you have not one, but two massive rebuilding projects and an unemployment rate of 4.5%, don’t you want to keep as much labour in the country as possible?
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