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Lack Of Consolidation Harms Canada’s Oil Patch


The oil and gas market in Canada benefits from the oil rally, but in the meantime there are opportunities for much-needed consolidation that can provide the competitive advantage over American oil companies.

According to data compiled by Bloomberg the deals of Canadian oil, natural gas and pipeline companies dropped 29 percent to $ 45.5 billion in the first seven months of 2018. If the investment of $ 22.3 billion to incorporate subsidiaries of Enbridge Inc., which owns and manages Canada's largest natural gas distribution network, would be excluded, the decline would increase to 64 percent.

In the same time, American deals rose 12 percent to $ 174.8 billion. Canadian oil and gas companies had hoped to gain a competitive advantage over cheaper shale drilling machines in the United States, with consolidation being an integral part of that change.

Increasing oil prices have prompted management teams to stay on course. They have also lost interest in the issue of diluted shares to finance Canadian acquisitions

Observers have called for the need for Canadian consolidation to reduce costs and compete with cheaper shale drills in the US

"The ability to to fall Inefficiencies are much greater when one group of people is working on an asset instead of two, "said Rafi Tahmazian, who helps manage approximately C $ 900 million ($ 690 million) of energy investments at Canoe Financial in Calgary . "That is simply a better way to go in this world today, where we are not focused on growing production alone, we are focused on the return."

Western Canada Select crude prices climbed 16 percent during the first seven months of 2018, better than West Texas Intermediate. The days of collapse of the crude prices that started three years ago are over, so Canadian wildcats were sold when the market recovery looked far away, according to Martin Pelletier, a portfolio manager at TriVest Wealth Counsel in Calgary.

Related: The Next Big Energy Standoff Will Happen Here

Tahmazian thinks that falling oil industry deals can also are explained by certain Canadian government policies, such as carbon taxes that make the energy sector of Canada less competitive than rivals in other countries. Another concern is a shortage of pipeline capacity in Western Canada that has damaged domestic producers who have to sell their crude oil and gas at discounted prices.

Energy producers had to rely on their own shares to pay for transactions, with investors and other bankers looking for new shares in these companies. It has had a significant impact on the market, with transactions with all shares accounting for 39 percent of deals this year compared to just 2.5 percent last year.

"In three to five years, we are going down through another transaction, and many of these companies can not survive," Tahmazian said. "This may lead to a forced sale at a much lower valuation, and it is important that potential sellers acknowledge that this is a risk for them."

Vermilion Energy Inc. and Baytex Energy Corp. both have arranged stock-outs. Both companies have an important presence in Canadian oil and gas production and distribution.

Oil and gas observers also question the impact of the fallout of Saudi Arabia with Canada on the Canadian oil and gas markets.

Saudi Arabia Arabia is outraged by Canada's criticism of the recent arrest of Saudi women's rights activists.

Saudi Arabia, the second largest source of oil imports in Canada behind the US, responds to what it sees as a growing foreign breach of its own internal affairs. The country said it will freeze all new affairs between Saudi Arabia and Canada.

The leading OPEC country will also remind thousands of Saudi students at Canadian universities, which is expected to impact the Canadian economy.

Related: China's oil futures jump to record high

The political battle between the two countries is under way. Ottawa had demanded that Saudi Arabia release detained women's rights activists.

Earlier this week, Saudi Arabia ordered the Canadian ambassador to leave Saudi Arabia "within 24 hours" after Canada's criticism of the recent arrests.

Canada's fight with Saudi Arabia has its roots in the OPEC oil crisis of 1973, when it was considered one of the Western powers that are part of the Arab oil embargo. The four-fold oil price surge drove Canada into a whirlwind that ultimately led to consolidation and growth in the market.

By Jon LeSage for Oilprice.com

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