Nope, not a pro-union polemic or an ode to summer in Canada. Instead, more of an observational piece designed to make everyone feel a bit better heading into the last weekend of summer.
Earlier this week, Tervita announced that it had sold its service rig business to High Arctic, a deal which followed on Strad Energy Service’s acquisition of Red Neck Rentals a couple of weeks ago

There has been ink spilled already on these deals, discussing whether so and so got fair value, or who won the deal or whatever. I`m not going to go there and that’s not what really matters.

What matters is that as sure as untimely fall snowfalls in Calgary, as we approach the Labour Day weekend, a bizarre annual ritual starts anew – that is the emergence of M&A activity.

It happens every year around this time, people come back from vacation, kids go back to school, the leaves turn (trust me – it’s Calgary), budgets 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 are leading the charge.

As we discuss with clients in the energy services space, there are certain key times of year when deals get put into 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.

So here we are in that first window and sure enough the green shoots are there.

Which is odd isn’t it? Especially in the context of the current market, as one would assume that activity should be in the tank, given the depression in the upstream oil and gas sector, but that is not necessarily the case if the chatter and what we are seeing in the trenches is to be believed.

So what’s happening to drive this?

In the current market, I like to think of it as a great realignment and repositioning. As I’ve said previously, good companies will always attract quality buyers and that is true no matter what the economic environment. There is just too much capital, too many smart investors and too much opportunity for the M&A market in oil and gas or energy services to go away. Let’s face it, notwithstanding some crazy guy at an NEB hearing in Montreal, the energy industry isn’t going anywhere. Also, as discussed in an earlier blog, this is a generational buying opportunity.

At this point, Labour Day 2016, we are now far enough from the industry peak in 2014 and close enough to a nascent recovery to motivate sellers to abandon irrational valuations and allow smart, well-financed and patient buyers to pick up businesses with a lot of runway ahead of them.

As to the opportunity, there has been on the one hand a fairly significant culling of the industry and on the other a buildup of capital, most importantly private equity, looking for a home. As the industry has contracted and margins compressed, the weaker players by necessity have started to fall by the wayside and the survivors move forward. Into this breach step buyers looking to consolidate industry segments, build asset bases, acquire customers and otherwise position themselves for the next upcycle.

Against this are the prices of oil and natural gas, which appear to have, if nothing else, stabilized at the marginal profitability level for many E&P’s. This allows producers to deploy capital into the market to keep their production numbers up, In Canada, this is made a bit easier as the great balance sheet deleveraging of 2016 may be more advanced here, allowing  efficient producers to access further capital to finally get to work.

I’m not saying there is in any way a return to the heady, frothy, 2013-2014 crazy times, but a gradual re-inflation of the industry is certainly in order. This recovery is going to be led by gold standard, efficient Canadian operators such as Seven Generations, Peyto and Crescent Point to name a few to industry heavyweights like Suncor, Husky and CNRL and a new breed of private equity backed management teams taking advantage of a historic market opportunity.

In this, I am cautiously optimistic, a sentiment that may be shared amongst more than a few, hence the seasonal acceleration of M&A activity.

An additional point to consider as the activity heats up is a gradual sector rotation from “safer” mid and downstream related businesses into upstream oriented service providers whose growth prospects are much more compelling in the fall of 2016 versus a similar time in 2014 given how far the market has fallen.

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, rentals and most anything site servicing related.

On the midstream side, we expect an ongoing influx of dollars into pipeline infrastructure whether it is new-build project related or maintenance and integrity related. While no doubt many of these businesses will see increased competition from upstream pipeline and facility contractors who have now gone through a full year of lackluster drilling activity and seen a resultant decline in tie-in work, the thesis on investing and maintaining critical infrastructure will always hold even if the market is about to get whole lot more competitive.

As far as who the buyers are, we anticipate a mix between Canadian strategic buyers including mid-market players and private equity funds looking to support these mid-market players and pursue their own particular investment theses. It is more than likely that this cycle will introduce us to the new breed of Canadian consolidators, likely some that will become household names, entrepreneurs who have an idea and a vision to grow their business into the next cycle through thoughtful and opportunisitic acquisition.

And it is at this time that we see many entrepreneurs elect to take advantage of an opening in the market to take some chips off the table, if only not to be so exposed the next time the cycle comes to pass.

As a final closing thought, we are often asked when is the “right time” to sell or buy and in this cycle, the question takes on even more relevance because of where the market is.

There is no easy answer to this as every business and entrepreneur is different. Really, there is no “right time” or “wrong time”, only “time” and that time is when there is a buyer with a vision and an idea that wants to buy for a fair price and the seller feels it is time to get out. It is a rare occurence that a desire to transition in or out of a business aligns with a market peak or bottom, so timing the market is a secondary consideration to whether someone is ready to step in, step away, step back or derisk. It”s all about matching opportunity and capital.

On the selling side, in any market, it is never a bad move to take chips of the table when the opportunity presents itself, given how volatile our industry can be and how unpredictable life is. When all is said and done, the only bad time to sell is when you are “forced to sell”.

As a buyer, if your business can stomach the integration and you are confronted with the generational buying opportunity such as we are in the midst of, the time to act is at hand. For the right idea and the right business, the capital will be there.

Prices as at September 2, 2016 (August 26, 2016)

• The price of oil ended the week down after a mid week plunge was offset by a “Friday before Labour Day” reprieve.
  • Storage posted a surprise increase
  • Production was down marginally
  • The rig count was up
• Natural gas was flat during the week on storage numbers

• WTI Crude: $44.44 ($47.64)
• Nymex Gas: $2.792 ($2.871)
• US/Canadian Dollar: $0.7695 ($ 0.7690)

Highlights

• As at August 26, 2016, US crude oil supplies were at 525.9 million barrels, an increase of 2.3 million barrels from the previous week and 70.4 million barrels ahead of last year.
  • The number of days oil supply in storage was 31.5, ahead of last year’s 27.3.
  • Production was down for the week at 8.488 million barrels per day. Production last year at the same time was 9.218 million barrels per day. The change in production this week came from flat Alaska deliveries and a decline in lower 48 production.
  • Imports shot up further to 8.917 million barrels a day, compared to 7.855 million barrels per day last year. It is hard to make any headway on US inventory numbers if the US is a dumping ground for everyone’s oil (aside from Canada’s of course)
  • Refinery inputs were flat during the week at 16.615 million barrels a day
• As at August 26, 2016, US natural gas in storage was 3,401 billion cubic feet (Bcf), which is 11% above the 5-year average and about 8% higher than last year’s level, following an implied net injection of 51 Bcf during the report week.
  • Overall U.S. natural gas consumption fell by 12% during the week on decreased power consumption
  • Production for the week was flat and imports from Canada fell 8%
• As of August 29, the Canadian rig count was at 111 (18% utilization), 75 Alberta (16%), 14 BC (18%), 30 Saskatchewan (26%), 2 Manitoba (26%)). Utilization for the same period last year was about 25%.
• Oil rig count at August 19 was at 407, up 1 from the week prior.
  • Rig count at January 1, 2015 was 1,482
• Natural gas rigs drilling in the United States was up 7 at 88.
  • Rig count at January 1, 2015 was 328
• US split of Oil vs Gas rigs is 82%/18%, in Canada the split is 52%/48%
• Offshore rig count was down 7 at 10
  • Offshore rig count at January 1, 2015 was 55

Drillbits

• Montreal hearings on the Energy East Pipeline project were cancelled after a protesters turned the Monday session into a side-show
• Enbridge withdrew its application for the controversial “Sandpiper” pipeline project in Minnesota, citing market conditions
• Justin Trudeau is in China trying to sell Canada’s oil while still being unable to deliver it. This makes Canada kind of like Tesla, doesn’t it?
• Vladimir Putin added his voice to those pushing for an oil freeze deal, exempting Iran, joining Iraq which said earlier this week it would support a freeze
• Canadian GDP fell at an annualized rate of 1.6% in the second quarter, starkly underlining the impact of the Fort MacMurray wildfires and the importance of the energy sector to the economy’s well-being.
• Drumpf Watch – Donald Drumpf made a surprise visit to Mexico on Wednesday and had a private conversation with Mexican President Enrique Peña Nieto, presumably to go over design ideas for his Wall, after which he praised Mexico and Mexicans and said he had lots of Mexicans who work for him (or was it that they worked for some of his best frieds who are black?). Anyway, upon returning from his visit, The Donald gave a “major” policy speech on immigration (why are they all major anyway?) where he doubled down on illegal immigration and promised to deport millions of illegal immigrants and criminals as soon as he became president. So I guess we know where he stands.