Many in the oil and gas industry expected to see increased levels of M&A activity in the upstream oil and gas sector, and in the broader oil and gas industry, as a result of prolonged depressed oil prices that first began their decline in June of 2014. We have discussed various views regarding this topic on this blog previously both here and here. In previous downturns, depressed prices have led to increased deal activity as distressed exploration and production companies ("E&P companies") are forced to sell assets to improve cash flow, assets are sold in the course of bankruptcy proceedings, well capitalized E&P companies and private equity funds seize opportunities to acquire prime assets at a discount, and E&P companies engage in strategic business combinations with each other or acquire distressed competitors.

Unfortunately for the oil patch, the expectation of increased M&A activity has not materialized in Canada's upstream sector and it remains lower globally than it was prior to the initial price collapse. According to Deloitte's Oil & Gas Mergers and Acquisitions Report – Mid-year 2016, the US has taken the lead with 72 of the 136 M&A deals in the upstream sector (representing 45% of total deal values) during the first half of 2016, with unconventional plays including the Permian basin and Marcellus play attracting the highest levels of investment. Canada came in second globally during the first half of 2016 with 29 out of the 136 M&A deals (representing 21% of the total deal values). Compared with the first half of 2015, there has been a slight increase in the total deal count but a decline in terms of total deal value globally.

According to CanOil's monthly reports (here, here and here), M&A activity in Canada's upstream oil and gas sector has continued to remain slow with total values of deals announced in the third quarter of C$2.5 billion. While a slow quarter for this sector in Canada, the upstream oil and gas sector was relatively busier outside of Canada with total values of deals announced of US$24.1 billion according to Evaluate Energy's recent report. The acquisition by Seven Generations Energy Ltd. of Deep Basin oil and gas properties in west-central Alberta from Paramount Resources Ltd. for C$1.9 billion represents the only deal involving Canadian upstream assets out of the top ten M&A deals announced in the third quarter. Deal values tend to be concentrated in a few large deals with the vast majority of deals involving the acquisition of relatively small upstream companies.

Explanations for low M&A deal activity at home and globally focus on volatility in oil prices, a large bid-ask spread between sellers and acquirers, and the ability of some producers to hold on to their prime assets while private equity funds with cash wait on the sidelines for the right opportunity. During the last quarter, oil prices have remained relatively stable as compared with the rest of the period since the price collapse, with WTI oil averaging US$44.74 and never exceeding US$50 or falling below US$40. While this price stability may lead to increased M&A deal activity, CanOils suggests that deal activity may still remain low in Canada as a result of producers being better positioned after completing the necessary realignment of their asset portfolios and decreased pressure to obtain financing as a result of a relatively stable oil price in the US$40-$50 range.

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