May 16, 2023
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When talking about the energy industry in Canada, you often hear the word consolidation. We looked at what some of the top legal and financial institutions in Canada have said about the consolidation environment in the Western Canadian Sedimentary Basin (WCSB)
In early 2021, the legal firm Torys LLP noted the challenges faced by the industry through the COVID19 Pandemic in their article What’s next for Canadian oil and gas in 2021. Looking ahead, Torys noted a flurry of consolidation and predicted:
“Consolidation activity will continue as companies seek scale and rebalance asset portfolios.”
Further, Osler, Hoskin & Harcourt LLP, states on their Energy – Mergers and Acquisitions page:
“Canada’s energy industry has undergone consolidation over the last several years and it’s unlikely that trend will change anytime soon.”
In a recent article published in Canadian Lawyer, Mergers and acquisitions in the Canadian oil and gas sector set to increase, Deloitte report says.
Deloitte also notes that M&A in the sector was at its lowest since 2008, but looking ahead:
“Mergers and acquisitions in the Canadian energy sector should be robust in 2023 thanks to more stable oil prices, well-performing companies and the pressure to deploy capital.”
According to the Oxford Dictionary, the definition of consolidation is as follows:
How much consolidation occurred from December 2020 to December 2022? Is it truly consolidation, or just moving around ownership of the molecules?
At the end of 2020, there were 5,782 licensed companies in the WCSB. At the end of 2022, there were 5,800. The split between producing and non-producing companies remained constant at 20% and 80%, respectively.
This means that 80% of the licensed companies have either land or assets with liability but no production. In the case of midstream entities, revenue from active facilities offsets this liability. For entities with land holdings only, there is value in the undeveloped land, which is area and zone specific. For others, there may be only liability associated with the licensed entity.
If we isolate producing companies simultaneously, the total dropped from 1,166 to 1,141, or by 25 companies. The total number of companies between December 2020 – December 2022 grew by 18, or less than 1%. Conversely, the number of producing companies between December 2020 – December 2022 decreased by 2%.
Looking at producing companies and distinguishing between private and public companies, of the 25 fewer producing companies, 18 were private, and 7 were public companies.
The total number of private companies dropped by 2%, while the number of public companies dropped by 6%.
On a production basis, the total production from the end of 2020 to the end of 2022 increased from 5.7 mmBoe/d to 6.4 mmBoe/d, an increase of 13%. At the end of 2020, 2021, and 2022, production from private companies represented 76%, 78%, and 77%, respectively, of the total production.
Production from private companies increased by 14%, while production from public companies increased by 7%.
As seen in the above charts, there have been negligible changes in the total number of companies, or in the shift of production between private and public companies in the producing space. But is it consolidation? Are these changes making the WCSB stronger as a whole?
When the number of producing companies in the WCSB dropped while the overall total number of companies increased, then the number of non-producing companies increased. From December 2020 to December 2022, non-producing companies increased from 4,616 to 4,659, or by 43 companies. Non-producing companies increased by 1%.
While that may seem like a small change, growth in liability, without offsetting revenue streams, can be a concern. Over this time frame, non-producing wells in the WCSB consistently represented 5% of the total gross wells. However, the total gross wells in this subset increased from 45,117 to 47,447. This data does not show which companies may have land or licensed facilities to offset the liability, but the trend is certainly something to note.
The total gross wells held by non-producing companies increased by 5% from December 2020 – December 2022.
Individual companies may get stronger through mergers and acquisitions. But for these changes to be considered true consolidation for the entire WCSB, the entire space must get stronger, more effective, or more coherent. Growing liability in the non-producing space is something to monitor and assess as we examine the impact of mergers and acquisitions to ensure liability can be balanced by revenue.
View a list of Total Non-Producing Companies by clicking here.
To read our last year’s edition on Consolidation in the WCSB, click here.
To learn more about how XI’s AssetSuite software can analyze companies, packages, or regions throughout Western Canada, visit XI Technologies or contact us.