Crude Observations

Last Day of Summer?

Ah Labour Day. The last day of summer. That annual celebration of the righteousness of the downtrodden worker, the brave collectives, union members putting it all on the line day after day in order to enrich the greedy corporate 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 103rd season of NFL football.


As most of you know, I am a huge NFL fan. And occasionally I do 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 a breezy and lazy assessment of the M&A environment. So I guess it means that 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 finally going to be a full-on CAPEX as we faced into a perfect storm of high commodity prices, escalating costs of, well, everything, supply chain blockages, natural disasters taking out entire swaths of industry, LNG prices so high that purchaser tenders are going unfulfilled, growing demand for all forms of fossil fuels and a societal desire for cheap, cheap, cheap energy and you would be forgiven for thinking that the energy sector was on the verge of something big.


And it looked that way for a while, rig counts certainly recovered as did provincial, state and national treasuries. Oil and gas companies started to spew out horrendous amounts of cash in the form of dividends, share buy backs and debt repayment. Except not so much in the way of CAPEX.


Then we had Russia and Ukraine. Ugh. Recession fears. Double Ugh. Interest Rate increases. Triple ugh. China’s weird COVID zero obsession which has led to a series of rotating lockdowns of major economic regions, all to the detriment of the Chinese and global economies.


Suffice it say that capital discipline has been great for cash flow generation. Not so great for what should be a production boom given all the supply issues that are staring us in the face.


So, where are we at now? Well, true to form, oil and gas prices had a great run and are still strong, even if they are strangely off their wartime peak (there’s still a war, right?). OPEC is meeting next week and the smart money is thinking they may actually cut production to support prices, or at the very least take off their increases that they had been supplying to the market for the past year – quotas they were consistently short on.


In addition, there are a couple of headfakes to deal with as we close out the year, almost all of which have something to do with the Biden response to hiogh gas prices (inflation) and the upcoming midterm votes in which the Dems hope to be able to stave off the traditional bloodbath and pull a fast one on a Republican Party that is a bot shaky on the heels of the repeal of Roe, Trump’s ongoing shenanigans and some really nutty and weak candidates.


The first is the ongoing re-negotiation of the Iran nuclear deal. Whether this gets done or not is anyone’s guess. If it were me, I wouldn’t be in a hurry to take sanctions of a regime that is still destabilizing Syria and Iraq, is selling drones to Russia and will be a giant backdoor for theoretically sanctioned Russian oil to enter the global system (here’s how it works – Iran exports all they want from the South and buys Russian oil to satisfy domestic consumption). That’s if it were me. But I’m not facing a mid-term evisceration, so instead the Sleepy Joe administration is playing chicken with markets by talking this up every chance they get, because you know, those Iranian barrels.


The second is the continuing depletion of the Strategic Petroleum Reserve. This has been a boon to motorists over the summer and, since there is no plan to replenish those reserves, has been not so good for producers. This inventory wasting move comes to an end in October, conveniently mere weeks ahead of the mid terms. Phew right?


Added to the mix is the European energy crisis which continues to be bullish for every energy producer that happens to be located in any place that doesn’t rhyme with Canada.


But these, as they say, are temporary.


There is still a war. Consumption is still sky-high. Energy insecurity is real. OPEC+ does not have a ton of spare capacity. Mexico is still a basket case. Iran is still a rogue state seeking nuclear weapons. China and India are still the fastest growing markets for fossil fuels in the world. 4% interest rates aren’t actually that scary and Russia is still bad.

Prices are below where they should be but are at a level where everyone, I mean everyone, is making bank and this year feels like the one where activity will start to really take off. If we can find any people to do the work.


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 Elizabeth Warren or John Kerry was President or if Justin Trudeau stepped aside to make room for his successor Stephen Guilbeault whose plans for the energy industry include a 100% reduction in emissions and 0 boepd production cap along with repurposing all the pipelines to carry maple syrup.


Yet here we are, Labour Day weekend, the sun is shining and the price of oil is holding at $87.50 and natural gas is a whopping $8.80 (yes, I know about AECO, don’t even get me started).


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. Or all three – we can be pretty volatile here.


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 2023 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, where producers are harvesting cash not barrels, one would assume that activity should be in the tank, but the reality is that the current market is pretty bullish for service companies in general, largely as a result of the self-selection and “culling of the herd” that has occurred over the last few years.


Scarcity is the name of the game and if you have equipment and more importantly, bodies, you are busy or soon will be. Consider this extract from Whitecap Resources recent operations update where they announced a modest expansion in CAPEX and the closing of their recent acquisition:


“The increased capital program will allow us to retain our current field services through the winter drilling season”


They aren’t the only one – this is happening across North America where producers see the scarcity of manpower and have realized that they need to keep the field busy or when they do finally decide to push the button on CAPEX and growth their desperate phone calls may likely go unanswered!


The flip side is that desperate cash-flush producers have lost the pricing power they had during the depths of the downturn and now the service companies are ascendant instead of procurement.


Service companies are finally making some money again. Which finally leads to M&A and the usual rogues gallery of young and hungry start-ups, savvy veterans giving it one last kick because they sat on the sidelines for three years and, finally, private equity.


As I never get tired of saying, good companies will always attract quality buyers and that is true no matter what the economic environment. There is just too much capital in the world 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 away from the desperation of 2016 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, we see buyers looking to consolidate industry segments, build asset bases, acquire customers and otherwise position themselves for the next few years, driven in large part by the larger infrastructure projects that are actually happening – LNG Canada, Trans Mountain Expansion and the NGTL work that seeks to get more WCSB gas out of the country at prices that reflect economic reality.


Against this is record oil production, massive profits and world that is about as insecure about energy as it has ever been. Sell Russia, buy North America.


I’m not predicting anything close to a return to heady, frothy, 2013-2014 crazy times, but we expect a robust M&A market going forward, led by gold standard, efficient Canadian operators.


An additional point to consider as activity increases is a sector rotation from “safer” mid and downstream related businesses into upstream oriented service providers whose growth prospects are suddenly more real than just a fancy slide deck saying “it’s coming”.


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. Next up are the drilling and completions companies and judging by activity levels reported, these companies are getting much busier.


On the midstream side, along with the mega projects currently underway, there is an ongoing flow 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 regardless of market dynamics.


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 Canadian multiples are much more reasonable and we have great prospects with LNG Canada on track.


Canadian companies are leaders in ESG and, of course, are among the most highly regulated in the industry. This makes them attractive on a relative basis compared to other basins.


So, we are as always cautiously optimistic on the M&A front, both from a business cycle and seasonal perspective.


Which I think I say every year, eternal optimist that I am. Plus M&A never rests.


Now, on to the NFL.


This 1,000,000th 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. Unless you are a QB signing a new contract. Then you’re just absurdly rich.


But… But…


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


Teams and players that are meant to win, win. Losers will always lose. Cities that exist on heartbreak will get their hearts broken.


The Super Bowl this year will be in Phoenix. The last time it was there, so was I. And Tom Brady outduelled Russell Wilson, Marshawn didn’t get to run and the pick sealed the deal.


I don’t think I will be there this year, so Russ doesn’t get a return trip with his shiny new Broncos helmet. But sentiment tells me that Tom goes back.


And he will play… Buffalo.




Well you know what I said above. Cities that exist on heartbreak will get their hearts broken.


I’ll let you figure it out from there.


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

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