(Bloomberg) — Canada’s oil patch is ripe for a mega merger, analysts say, after a bumper year for deals has left relatively few smaller targets available.
The value of deals executed or pending as of Dec. 31 totaled $37.8 billion, according to data compiled by Bloomberg. The value of those transactions exceeded that of any year since 2017, when international oil majors including Shell Plc. and ConocoPhillips began selling oil sands assets to local companies, data compiled by Bloomberg show.
Since then, a wave of consolidation in the Canadian energy patch has put control in the hands of an increasingly smaller group of companies. Canadian Natural Resources Ltd., Cenovus Energy Inc., Suncor Energy Inc., ConocoPhillips and Exxon Mobil Corp.’s Imperial Oil Ltd. account for roughly 85% of Alberta’s oil sands production.
Any major deals would follow a series of massive transactions in the U.S. shale patch in recent years, driven by efforts to improve efficiency in shale plays where drilling has become costlier and margins thinner. Exxon Mobil bought Pioneer Natural Resources Co. in 2024 and Chevron Corp.’s purchase last year of Hess Corp. included significant shale assets.
“From what we’ve seen in the U.S., there’s been five mega deals” in the last two years, BMO Capital Markets analyst Jeremy McCrea said by phone. “We haven’t seen that yet in Canada, but it doesn’t mean that it can’t happen here.”
Oil’s almost 18% decline in the past two years combined with the prospect that export pipeline capacity out of Canada will once again become scarce in the coming year or two is encouraging companies to focus on buying other oil and gas producers as opposed to expanding production from their own well sites. Last year, Cenovus purchased rival oil sands producer MEG Energy Corp. for $5.61 billion.
“A lot of people are asking the question whether there’ll be some consolidation between these bigger players,” Grant Zawalsky, senior partner at the law firm BD&P, said by phone. “The medium and small oil sands players are a pretty short list.”
Canadian Natural, the largest domestic oil company, benefits from a low cost of capital and its size allows the company to take on new projects, Zawalsky said. The company has grown rapidly since 2017, when Canadian Natural bought Shell Plc’s oil sands mining operations. The company didn’t respond to an email seeking comment.
Suncor has mostly focused on growing internally. Its last acquisition of an entire company happened in 2009 with the purchase of Petro-Canada. But Chief Executive Rich Kruger signaled that could change in an investor call earlier this month.
“We’ve earned the trust and credibility that any and all actions we do, internal or organic or inorganic, will be in the shareholders’ best interest to increase their ultimate value,” he said.
The comment drew the attention of Menno Hulshof, managing director of equity research at TD Cowen, who said he’s “had a lot of conversations about that over the last several days.”
“They basically said, listen, we’ve spent years right-sizing the ship. We’ve clearly delivered on that,” he said. “We have the flexibility to consider those things now.”
An email to Suncor for comment was not returned.
Years of belt tightening after the pandemic and a surge in oil prices in 2022 shored up the largest energy producers financial states. Companies are probably more likely to buy and sell individual assets, but they may be reluctant to part with them given their strong balance sheets, Hulshof said.
“If we did see a mega merger this year, I wouldn’t be completely surprised,” he said. But it’s “more likely” over the next several years.
The start of the Trans Mountain Expansion Pipeline in May of 2024 provided Western Canada a rare surplus of oil export capacity as well as new access to Asian markets, giving oil companies impetus to expand their own production. But that is beginning to change.
Rising oil sands output has begun to put strains on pipeline capacity with Enbridge Inc. rationing the most space on its Mainline system to the U.S. this month than any time since before the opening of the Trans Mountain expansion.
At the same time, a sudden increase in the volume of Venezuelan crude being shipped into the Gulf of Mexico after U.S. military action in January has put downward pressure on the prices oil sands producers receive for their dense, high-sulfur crude. This month, Canadian heavy crude on the Gulf Coast faced its widest discount to U.S. futures prices in more than two years.
“It’s not very appealing,” BD&P’s Zawalsky said, “to drill expensive long-term projects to grow your production if you can’t move them to market at world prices.”
