In Conversation with KPMG in Canada’s National Energy Leader Shane Doig

Shane Doig, KPMG's Canada's National Energy Leader

Shane Doig has been with KPMG over 20 years, is KPMG in Canada’s National Energy Leader, a member of KPMG’s National Markets Committee and an audit partner based in Calgary. He has significant experience serving public and private entities operating in Canada, the U.S. and internationally. Shane’s focus on auditing and accounting issues is augmented by his experience with equity and debt offerings, acquisitions and tax structuring.

The Daily Oil Bulletin/JWN Energy engaged Shane to give us insight into the broad trends that impacted oil and gas operators the last five years, and how these trends will play out in the future.

Canada’s oil and gas sector has faced tremendous challenges since the 2015 oil price collapse—price volatility; market access issues; limited access to capital; the pandemic; integrating ESG; the energy transition; and now the resurgence of energy security. Big picture, how have all these challenges affected the long-term trajectory of the industry?

It has been a whirl wind over the past six years but what has emerged is a far more balanced conversation around energy and the role of oil and gas in the future of energy diversification. Conversations are shifting from extremes which enables a more practical and reliable path forward as we diversify our energy sources to less carbon based forms. Within energy companies there is increased focus on balancing ESG, growth and return of capital. It is challenging to run an organization with a singular objective, thus the increased focused on balancing the needs of various stakeholders is welcomed.

Access to capital has been challenging, which is closely related to the challenges mentioned above. Equity financings have been limited. With current higher commodity prices and a more optimistic outlook do you see a return to equity markets?

As an increased amount of balance has returned to the energy diversification conversation coupled with the focus on all three letters in ESG the role of oil and gas in the energy conversation has shifted. This is coupled with an increased focus on return of capital to investors. Add this all up and the industry likely has an increased ability to access external capital. However, is it needed? We have seen equity and debt offerings in the current market but the need to access external capital at current levels of cash flow is more limited.

Low-cost debt financing fuelled significant production growth during the previous price cycle. With interest rates rising, and many companies still dealing with debt repayment, do you see debt financing becoming a less attractive option? Will companies continue to run on cash flow or will some leverage debt to grow?

An incredible amount of debt has been retired as commodity prices increased and overall the debt burden in the industry has reduced considerably. There continues to be entities focused on further debt reductions, notably in the energy services sector where cash flows have not grown at the rate experienced in the upstream sector. Interest rates are rising but the cost of debt, whilst not at all time lows, is still far from the highs experienced by more seasoned veterans of our industry.

There will be resistance from companies to add leverage (a bit of the “we just got out of debt and you want to go back?”) but deals and to a lesser extent organic growth, need debt. We will see deal flow increase and with it debt but at a measured pace.

We have seen a number of new sustainability or ESG performance-related debt deals lately. As lenders feel more pressure from NGOs and investors, will this continue and become mainstream?

Yes! ESG linked lending and ESG targets tied to compensation will continue to increase in number and the impact of these metrics will grow.

Canada has seen a major exodus of international operators the last five years. Will this loss of well capitalized and globally connected multinationals impact the construction of megaprojects like LNG export facilities or petrochemical expansions?

It is unfortunate that several events occurred that resulted in international majors retracting from a world-class resource in a country that has well-established ESG practices. However, we continue to see large-scale projects led by Canadian oil and gas majors. In addition, we have seen the ever-increasing role of First Nations groups in driving major developments and investments in energy projects.

International super majors will be missed and their absence may slow down certain major developments, however, I do not underestimate the ability of Canadian majors to continue to responsibly provide critical energy.

Oilsands operators have consolidated upstream assets and vertically integrated downstream the last five years. What were the key drivers behind this trend and do you see it continuing?

Vertical integration is an important component to large oilsands players’ ability to capture the margin along the entire hydrocarbon chain. For large players with the ability to play in the upstream, midstream, downstream and even the retail sector there is considerable opportunity to increase returns. This trend will continue for majors as they continue to balance their upstream and downstream portfolios.

Is the downstream segment a growth opportunity? That is a harder call. Will major refineries be built in North America? That seems less likely. However, the ability to maximize the value chain is far more than a downside risk management play.

We’ve also seen the emergence of a few natural gas giants that have captured major market share through M&A activity in the Montney and Deep Basin. What’s driving this activity?

Montney and Deep Basin drilling can be cost intensive operations where size and scale are critical to be competitive. Couple this with the goal to backstop large supply agreements and you get a few large-scale producers in an area.

However, with spot natural gas prices continuing to increase there may be a surge in smaller dry gas companies looking to benefit from what may be a stronger long-term pricing environment without the need for contracted offtake agreements.

M&A activity has also created a number of new large intermediate or smaller senior producers with production ranging from 75,000-125,000 boe/d. Will this continue?

We have seen considerable increase in the amount of production needed to thrive in the sector. How many 1,000 boe/d juniors are left in the industry compared to 20 years ago? The level of production necessary to withstand the volatility in our sector continues to increase and this trend is likely to continue.

With limited access to capital, we have seen shares make up a substantial part of the value of deals. With higher prices and free cash flows, will this continue?

Lower share prices across the sector did lead to more share for share deals. However, entities now have increased access to debt markets and the increased leverage can be supported by rising cash flows. In short, we may see a shift to levered deals where the debt is retired post-acquisition more rapidly than we have seen in the past.

The current emphasis in industry is debt repayment first, then shareholders returns, and finally growth. Do you expect to see a shift to growth in the near term?

The conversation has shifted in the upstream sector to further balance ESG, growth (organic and via M&A) and return of capital. All three are important! Considerable amounts of debt have been retired and many companies have an established return of capital program. This then leads to an increased focus on growth in all its forms. We have seen recent moves from upstream entities to grow their existing portfolios (both onshore and offshore) and whilst M&A activity was slower in the first part of 2022, deals volume should increase as the environment stabilizes more.


Editor’s note

The last five years have been a hard ride for Canadian oil and gas producers.

Wild price volatility, a pandemic-induced price crash, ongoing market access issues, oil production curtailment, the rise of the ESG movement, and finally a geopolitical crisis are just some of the challenges industry faced.

The end result of this period of instability is a reinvigorated industry – forged in fire so to speak – and ready to take on the world as the commodity cycle turns once again.

The 2022 Top Operators Report examines the 2017-2021 timeframe, identifying key trends that shaped the present energy landscape and what lies ahead for the 62 Canadian headquartered public operators tracked this year. 

To sort through these challenges we are once again leveraging the experience of professional services firm KPMG in Canada to provide insight into the last five years of change and what strategies operators could pursue to thrive in the inevitable turbulence ahead.

Data analysts from Evaluate Energy are providing context to the stream of information coming from corporate financial reporting and other relevant documents. Analysts from geoLOGIC systems ltd. offer context into trends in activity and technology to manage costs. 

We’re also tapping into a broad swath of the insights and opinions from industry leaders gleaned from Daily Oil Bulletin coverage.

To download the 2022 Top Operators Report, click here.

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