June 29, 2020
The oil and gas industry is seeing continued use of strategic alternatives as exploration and production companies fight for survival in a post-COVID-19 environment.
In an article that discusses how survival is top-of-mind for boards and management for oil and gas companies, Daily Oil Bulletin quotes Calgary partners Stephanie Stimpson and Chris Christopher from their episode of Torys Business Brief.
“The pandemic and the dramatic drop in demand hit when the industry was already stressed and facing a lot of pressure on the pricing side. We saw commentary after prices went negative in April asking, ‘Is this industry facing an existential crisis?’” Stephanie said.
Stephanie says merger and acquisition activity on the E&P side will look different after COVID-19, as deals might take a more “creative side” given tight debt and equity markets.
“We expect to see an uptick in M&A as the year unfolds, with more distressed companies and opportunistic buyers stepping in,” she said.
“In terms of the type of deals we’ll see, I think private equity and the pension funds will continue to invest in the right kinds of assets that they’ve been interested in and had an appetite for over the last several years, like the infrastructure and midstream assets.
“And among the producers, we’ll likely see companies getting more creative and trying to do deals that don’t require a big cash outlay or increased debt levels — companies doing deals with share consideration and structuring joint ventures and asset exchanges.”
Chris was also quoted in the story from the same podcast episode where he queried “whether or not investment will return in a meaningful way”.
“The downturn of the last five years was too tough for many companies who went bankrupt,” Chris said.
“Those that remain are going to be asking themselves why an investor would risk dollars in an industry where its main commodity can go below breakeven costs of around $40 per barrel for extended periods of time.
“A quick rebound in oil and gas prices would result in improved cash flow and operating metrics and could bring investment back. But industry analysts expect a sluggish recovery and the industry may be more negatively impacted than other sectors once the health crisis subsides and the economy begins to recover.”
Get more written analysis from our Calgary practice on the future of Canada’s oil and gas sector in “What’s next for Canadian oil and gas as COVID-19 adds to existing challenges”.
You can find all our oil and gas insights and analysis on our practice page.