Crude Observations

Get back to work, slackers!

Ah Labour Day. That annual celebration of the righteousness of the downtrodden worker, the brave collectives, putting it all on the line day after day in order to enrich the greedy capitalist fat cats who live for exploiting the masses.


And which union am I talking about most specifically here? Why none other than the NFLPA (NFL Players Association) and their hardworking members as they head into what is the 100th season of NFL football.


As most of you know, I am a huge NFL fan. And earlier this month I promised an NFL preview blog, so I am going to do one. Just a bit later.


Because I have another Labour Day tradition and that involves an assessment of the M&A environment. So I’ve gotta do both. So here goes.


Last year at this time, energy prices had rallied during the summer leading many to believe that the year to come was going to be a full-on recovery only to be undone by a combination of Trump tweets (what else is new) and modest OPEC production growth that saw prices crater in shocking fashion. Even when prices recovered, Canadian producers were forced to contend with blown out differentials, budget fatigue and the soul crushing court decision on the TransMountain Expansion.


So, where are we at now? Well, true to form, oil prices had started the year strong, only to be undone by Trump tweets and his War on Trade TM. But a funny thing seems too be happening. Prices are kind of stable. Which is good. And stable at a level where a lot of Canadian companies can make a lot of money. And after two additional years of maintenance capex and curtailment and lousy differentials it is actually starting to look as if some things may be lining up for us rubes in Canada.


I mean seriously, we have weathered pretty much every sling and arrow that can come our way, right? The only way things could have been worse is if Bernie Sanders was President (he wants to put energy CEOs in jail) or if Elizabeth May somehow became important (you remember her economic plan, right? Destroy the industry by 2022?).


Allow me to be the first to say this – neither of those two things will happen.


But Labour Day, it’s an interesting time of year is it not? Here in Calgary Labour Day can bring a snowfall, or a thunderstorm or a 32 degree sun splash for the Labour Day Classic football game.


What is also for sure is that as we enter the Labour Day weekend, the proverbial back to school/back to work switch gets triggered and Calgary’s business community gets busy again in preparation for a hoped for “busier than last year” drilling season, since like any true energy industry participant, we are nothing if not optimists.


It happens every year around this time, kids go back to school, the leaves turn (trust me – it’s Calgary), budgets for 2020 start getting set and the pace of M&A heats up, regardless of stage in the commodity cycle or the commodity price, the only difference being whether it is upstream, midstream or downstream and which particular subsectors leading the charge.


As we discuss with clients in the energy services space, there are certain ideal times of year when deals get more attention in the market or start getting done. These times are just after Labour Day but before American Thanksgiving, just after Christmas and before March and then, for Western Canada, post spring break up.


For a variety of reasons, these times of year work, driven mainly by the service sector activity cycle but also by the buyer demographic and energy company capital budget timing.


In the context of the current market, one would assume that activity should be in the tank, given the depression in the upstream oil and gas sector, but that is not necessarily the case if the chatter and what we are hearing on the ground is to be believed.


So what’s happening to drive this?


In the current market, I like to think of it as a great realignment and repositioning. As I’ve said previously, good companies will always attract quality buyers and that is true no matter what the economic environment. There is just too much capital and the industry is too important for the M&A market to go away. In many ways this is an ideal time for smart buyers to start doing deals as we are far enough from the industry peak in 2014 and close enough to a resolved egress environment to allow well-financed and patient buyers to pick up businesses with a lot of runway ahead of them.


As to the opportunity, there has been on the one hand a fairly significant culling of the industry and on the other a buildup of capital, most importantly private equity, looking for a home. As the industry has contracted and margins compressed, the weaker players by necessity have fallen by the wayside and the survivors have retooled their business models and moved their businesses forward. Into this breach step buyers looking to consolidate industry segments, build asset bases, acquire customers and otherwise position themselves for the next upcycle, driven in large part by the larger infrastructure projects that are actually happening – LNG Canada, Trans Mountain Expansion and Line 3.


Against this are the prices of oil and natural gas, which appear to have, if nothing else, stabilized at current levels, allowing E&P’s to deploy internally generated cash flow into the WCSB to keep production numbers at least steady, if not growing slightly in key regions, allowing some service sector participants to get back to work.


I’m not predicting anything close to a return to heady, frothy, 2013-2014 crazy times, but a gradual re-inflation of the industry is certainly in order, led by gold standard, efficient Canadian operators.


An additional point to consider as the activity increases is a gradual sector rotation from “safer” mid and downstream related businesses into upstream oriented service providers whose growth prospects have been muted for the past year with curtailment but can now see the light at the end of the tunnel.


On the upstream side, industry subsectors that have been the most beaten up during the downturn are often the ones to see the first levels of interest – mainly companies that provide front end services such as engineering, planning, infrastructure services like road and right of way clearing, smart rentals and most anything site service related such as safety, security and medical services.


On the midstream side, along with the mega projects currently underway, we expect an ongoing influx of dollars into pipeline and processing infrastructure whether it is new-build or maintenance, turnaround and integrity related. The thesis on investing and maintaining critical infrastructure will always hold even if the market is about to get whole lot more competitive.


As far as who the buyers are, we anticipate a mix between Canadian strategic buyers including mid-market players and opportunistic private equity funds looking to support these mid-market players and pursue their own particular investment theses. We also anticipate that more US based buyers will be coming to kick the tires in Canada, as the Permian is an over-heated M&A market and Canadian multiples are much more reasonable.


So, we are as always cautiously optimistic on the M&A front, both from a business cycle and seasonal perspective, the evidence being our own client base and actual market evidence as well as a general feeling that with these projects coming on stream, many owners and management teams will prefer to have their companies built and oriented towards growth long before any commodity travels down a tube.


Now, on to the NFL.


This 100th NFL season is going to be epic. I feel it. Lots of exciting young stars, emerging teams, holdouts galore, surprise retirements and team altering injuries, trades and suspensions. The pre-season was, as always, abysmal and excruciating.


But… But…


Much like Calgary after Labour Day and the M&A market, the NFL is completely predictable.


Super Bowl this year will be New Orleans vs the Evil Empire. And New England will win again.


There, I called it. Without watching so much as a snap.


Have a lazy weekend. Back to work in earnest on Tuesday!

Prices as at August 30, 2019

  • Oil prices – Finally a normal week
    • Storage posted a “yuge” decrease week over week
    • Production was up
    • The rig count in the US was down and Canada was up
    • Prices rallied then fell at the end of the week. For no reason really. Global growth concerns
    • Natural gas storage was up and remains higher than this point last year
  • WTI Crude: $55.01 ($53.88)
  • Western Canada Select: $43.01 ($41.02)
  • AECO Spot : $1.0127 ($1.109)
  • NYMEX Gas: $2.278 ($2.160)
  • US/Canadian Dollar: $0.7520 ($0.7522)



  • As at August 23, 2019, US crude oil supplies were at 427.8 million barrels, a decrease of 10.0 million barrels from the previous week and 22.0 million barrels above last year.
    • The number of days oil supply in storage is 24.4 compared to 22.9 last year at this time.
    • Production was up marginally for the week at 12.500 million barrels per day. Production last year at the same time was 11.000 million barrels per day.
    • Imports fell to 5.928 million barrels from 7.218 million barrels per day compared to 7.485 million barrels per day last year.
    • Exports from the US rose to 3.019 million barrels per day from 2.803 million barrels per day last week compared to 1.175 million barrels per day a year ago
    • Canadian exports to the US were 3.201 million barrels a day
    • Refinery inputs rose during the during the week to 17.408 million barrels per day
  • As at August 23, 2019, US natural gas in storage was 2.867 billion cubic feet (Bcf), which is about 3% lower than the 5-year average and about 15% higher than last year’s level, following an implied net injection of 60 Bcf during the report week
    • Overall U.S. natural gas consumption fell by 4% during the report week.
    • Production for the week was flat week over week. Imports from Canada were down 15% from the week before. Exports to Mexico were flat for the week but are expected to grow with a new pipeline expected to be in service next week
    • LNG exports totaled 30 Bcf
  • As of August 30, 2019, the Canadian rig count was up 11 at 150 (AB – 96; BC – 9; SK – 40; MB – 3; Other – 2). Rig count for the same period last year was 207.
  • US Onshore Oil rig count at August 30, 2019 is at 742, down 12 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States was flat at 162.
    • 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 26.
    • Offshore peak rig count at January 1, 2015 was 55

US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 67%/33%


Trump Watch: Fantasy call with China. Has to get his loans co-signed apparently.

Kenney Watch (new!): Nothing exciting this week that I recall!

Trudeau Watch (for balance): Watch me spend my way to an election call. $8 billion and counting this summer…

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