Get Closer - Canada's Natural Gas Producers Face Increasing Pressure to Merge

Corporate mergers and asset acquisitions are the normal course of business in almost any industry, but the pace of this kind of activity has recently picked up among Canada’s natural gas producers. Battered by several years of low prices, market share loss, and declining production, the position for many already-struggling gas producers only got worse when COVID hit last year. As you might expect, better placed and stronger gas producers are looking at struggling companies that have attractive assets to see if they might make accretive asset purchases or outright corporate takeovers. Today, we examine some of the most prominent natural-gas-related transactions and the motivations behind them.

Canada’s natural gas producers, perhaps even more so than their U.S. cousins, have had an exceptionally tough time the past few years. Crazy-low summer pricing and volatility, loss of market share in the U.S., and declining production were the issues that plagued the industry in the late 2010s. And that was before COVID arrived a year ago this month, further decimating the industry with immense uncertainty and further reductions in cash flow and production as drilling activity dried up. If there was a bright spot in 2020, it was that benchmark AECO prices recovered in the summer to levels well above what was seen in the previous three summers.

Unfortunately for some Canadian gas producers, however, the 2020 AECO summer price recovery was too little, too late. Limited cash flows, disappointing earnings, high debt levels, and little to no access to equity or additional debt had become too much to bear. Not to mention, a growing investor emphasis on environmental, social, and governance (ESG) issues served to further hinder the path to recovery for some producers. Short of declaring outright bankruptcy (and some have done that), the alternative for these companies was to either sell assets or merge with a stronger producer to save what had been built up in prior years.

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