Lexpert Magazine

LEXPERT MAGAZINE | MARCH 2016 47 | ENERGY | little bit" as desperation rises, says Carson. "We are starting to see more transactions occur on the non-core asset sales. And that has been mainly because sellers lowered the price they are willing to accept" as oil went into the $30s. While few outright bankruptcies have yet to hit the Canadian energy sector, some juniors have been extinguished by contin- ued weak commodities prices. Two days before Christmas, Calgary-based junior Shoreline Energy Corp filed for bankrupt- cy aer a failed merger attempt and selling assets to satisfy secured creditors. Green- field mentions Spyglass Resources Corp. as a recent casualty. A better scenario than bankruptcy and receivership, he notes, is to file for protection under the Companies' Creditors Arrangement Act (CCAA). at allows companies to keep creditors at bay and restructure for a period of time while they continue to run their business under a court-appointed monitor. Both Connach- er Oil and Gas Ltd. and Laricina Energy Ltd. in Alberta took that route. "Companies with a lot of bank debt are going to be seeing their banks write down the lending value of their reserves, and see- ing their borrowing limits cut back," pre- dicts Greenfield. at would presumably cheaper as their stock prices plummet in concert with commodity prices. But could the shockingly low oil prices and some gut- wrenching forecasts of even US$20 crude in 2016 scare off even private equity, re- gardless of attractive valuations? ough he's occasionally wondered that, Flaman doesn't think so. He has represented some of the largest private-equity firms in the world, including US firms Blackstone Group and Kohlberg Kravis Roberts & Co. (KKR) as they've sought interests in Cana- dian energy assets in recent years. In conversations with those PE clients, says Flaman, "ey actually don't take that Chicken Little the-sky-is-falling view. ey take the view these things work in cycles. You look back at the last cycle around the financial crisis in 2009 and 2010, and the headlines were the world is ending. "In a nutshell," he continues, "when commodity prices are low, well-capitalized PE firms, as a general statement, like to take advantage of that environment and acquire quality assets." He sees that activity ramp- ing up in 2016, with both American PE firms and smaller Canadian ones such as ARC Financial Corp. and Azimuth Capi- tal Management seeking quality assets. So far, the bulk of PE interest has been focused on midstream assets such as transportation systems and pipeline facilities, oil and gas storage or processing plants. PE firms generally aim to recoup a return on their investments via a liquidity event in five to seven years. ey'll either privately sell a company or asset, or take a company public with an IPO and sell equity in it through the stock market. But, says Neville Jugnauth – Flaman's colleague and a fellow partner at Torys in Calgary – until the dust is settled on such issues as the Alberta Royalty Review, the province's Climate Leadership Program and the Paris agreement on climate change, PE firms may hold back on triggering deals in the Canadian energy sector. FROM PARIS TO ALBERTA e Paris agreement, signed December 12th, won't become legally binding unless at least 55 countries representing 50 per cent of global greenhouse gas (GHG) emis- sions ratify it in New York in April. It calls on signatories to curb aggregate emissions sufficiently to hold the increase in the glob- force them to do things to raise cash, such as selling non-core assets. "Or worse, core assets," he adds. Greenfield also sees the pool of oil & gas juniors and ex- ploration and production (E&P) companies shrinking even more this year. at worries him: Tra- ditionally, the juniors have fos- tered much of the innovation in the sector. BENDING FOR ROYALTIES e other defensive theme is selling royalty assets. Primarily, stresses Janice Buckingham in Calgary, who chairs Osler's Oil & Gas Practice, the royalty deals being done are not by companies in great financial distress. Instead, they're companies trying to monetize interests that are no longer core assets. e money raised may be used to pay down debt or re- invest in their highest margin operations. In June of this year, for example, the Ontario Teachers' Pension Plan paid $3.3 billion for Cenovus Energy's Heritage Royalty Limited Partnership, a portfolio of oil and gas royalties on nearly five-million acres of land in western Canada. at land generates royalty revenue from other com- panies, which drill and produce oil and gas on it. In a statement at the time of the sale, Cenovus CEO Brian Ferguson stated the proceeds "will strengthen our balance sheet and provide us with greater resilience during these uncertain times as well as the flexibility to invest in organic projects with strong returns." "As much as we wanted to hope there would be a short-term price recovery," Buckingham says, "the lower-for-longer price mentality has been accepted by com- panies. So we're looking at different sce- narios in order to maintain profitability in the hopes prices do recover — because they always do. And when prices recover, they will be well positioned." PRIVATE EQUITY Speaking of well positioned, sniffing for opportunity are cash-rich private-equity firms, not to mention Canadian pension funds. ey're looking for companies with reasonable balance sheets and proven as- sets, but whose valuations have become "[N]O ONE now is making investment decisions today based on current oil prices." SANDY MACDONALD, COX & PALMER PHOTO: REUTERS

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