A two-month-long bidding war in Canada’s oil patch signaled there is another way for a company to boost its production and resources than investing in new oil sands production, which is considered the world’s most expensive source of new oil supply.
The acquisition saga for MEG Energy appears to have ended after the hostile bidder, MEG’s shareholder Strathcona Resources with a 14% stake, terminated its takeover pursuit on Friday. This followed a sweetened offer by the rival bidder, Cenovus Energy, which earlier last week sweetened its offer for MEG Energy, and MEG’s board accepted it.
“While Strathcona is disappointed with this outcome, it is pleased that its actions, along with those of its fellow MEG shareholders, delivered something which the MEG Board could not, namely a more equitable transaction with Cenovus which allows MEG shareholders to participate more meaningfully in future upside,” the rejected bidder said.
Strathcona dropping the takeover pursuit was unexpected for some analysts who had anticipated a sweetened offer from Strathcona, too.
One of the most contested and unusual M&A battles in Canada’s oil and gas sector may be over, but the companies’ pursuit of additional existing resource base and production is not.
Consolidation Favored Over New Oil Sands Development
Consolidation has become the key growth driver for bidders who prefer buying existing operations to pouring the same or higher amount of money into new oil sands production, Reuters Breakingviews columnist Robert Cyran argues.
The breakeven costs for existing oil sands operations are below US$50 per barrel WTI, according to estimates by S&P Global Commodity Insights.
On the other hand, oil sands remain the most expensive source of new supply, intelligence firm Rystad Energy has estimated.
New oil sands production breakevens average $57 per barrel, but can go as high as about $75, according to Rystad Energy.
“One of the greatest misconceptions about oil sands, defined as synthetic crude oil and undiluted bitumen, continues to be the cost of supply,” S&P Global Commodity Insights said in June.
While new projects need huge upfront expenditures over many years, “that is not the cost structure required to continue to maintain and even optimize existing production,” S&P Global Commodity Insights noted.
Existing production has much lower breakeven costs than new oil sands supply. That’s why major producers prefer buying developed assets to embarking on costly development of new resources.
Canadian Producers Are Boosting Output Without New Projects
Canadian producers are boosting crude production even if they aren’t starting up new projects. The secret sauce appears to be reducing maintenance times and extending maintenance cycles to squeeze more oil and raise efficiencies, Bloomberg reported earlier this year.
Encouraged by the expanded Trans Mountain pipeline, which increased takeaway capacity from Alberta to the British Columbia coast and to global markets, Canadian producers are raising output even as oil prices have declined this year from last year.
A new pipeline with a capacity of up to 1 million barrels per day (bpd) proposed by the province of Alberta could also be considered by the federal government as Prime Minister Mark Carney set up a Major Projects Office to back and accelerate critical energy infrastructure to make Canada an energy superpower and diversify its energy exports to reduce dependence on the U.S. market.
Despite lower oil prices, Canada’s oil sands production is expected to reach an annual all-time high of 3.5 million bpd this year, thanks to optimization and efficiency at producing assets, S&P Global Commodity Insights said in June in its latest outlook.
Oil sands volumes are expected to top 3.9 million bpd by 2030, per S&P Global Commodity Insights. The projection for 2030 is 500,000 bpd higher compared to the 2024 production level and is 100,000 bpd – or almost 3% — higher compared to the previous 10-year outlook.
M&A Driven by Efficiency and Scale
Riding the growth momentum, major Canadian producers seek to add producing assets via acquisitions.
“It might not be quite merger mania in Canada’s oil and gas sector this year, but activity has been steady and filled with several headline-grabbing items,” analytics firm RBN Energy said last month.
Companies are looking to raise the value for shareholders by boosting efficiency in operations and reducing operating costs. They also seek to scale up to compete with both domestic and international rivals, RBN Energy said.
By Tsvetana Paraskova for Oilprice.com
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