In the wake of a challenging year, the oil and gas industry in Canada experienced not only the upheavals and uncertainty caused by the pandemic, but also the opportunities. While many operators didn't survive, for example, those that did became stronger and more efficient. The shift to working from home prompted operator's digital transformation. And with greater focus on ESG concerns, the energy transition accelerated. KPMG professionals contributed insights on these and other topics about the future of the Canadian oil and gas industry for this year's Daily Oil Bulletin Top Operators 2021 report, a yearly ranking of Canada's leading public oil and gas companies.
In this industry overview, Michael McKerracher, KPMG's National Industry Leader for Energy in Canada, notes that while the global economy is gradually recovering, oil and gas operators can't let their guard down. Market uncertainty means operators must balance investment of cash flow, and repairing balance sheets remains the top priority. Investors are looking for improved ESG performance and strategies to navigate the upcoming energy transition, and operators have opportunities to automate back-office functions and leverage data analytics to make better decisions. And while McKerracher is not certain that spending on carbon credits is a good long-term strategy, he does see success in long-term lower debt, sustainable dividends, and having funds for carbon-zero efforts. "Production is needed now and for decades to come," he says, "but it's not going to get any easier."
Creating shareholder value
With investors still reeling from the volatility of the past few years, Grant Brown, Managing Director, KPMG Corporate Finance Inc., sees little appetite to take on risk, and the days of investors rewarding oil and gas operators solely for growing production and reserves are long gone.
Managing financial risk
Michael McKerracher points out that debt is the biggest financial risk for Canadian operators. The lure of low-interest capital in recent years led to the demise of some, as they were unable to continue refinancing and rolling forward their cheap U.S. debt. Now, in addition to paying down debt, operators will need to manage pricing volatility and the long-term demand growth outlook. Rather than projects with long payouts, coming years will likely see the industry focus on smaller projects that optimize cash flow.
Return of the dealmakers
Grant Brown highlights the growth in M&A in Canada, with deal values rising from $5B in 2019 to more than $10B in 2020, a trend that has continued so far in 2021. In addition to the traditional drivers – asset proximity, operational leverage, field consolidation and access to capital – Brown also stresses the demands of the challenging market: "companies need to find ways to build efficiencies, and other ways to grow."
Having survived the challenges of the pandemic, Canadian oil and gas leaders can now take stock of the changes that will be needed for success in the future.
Grant Brown notes that the continued pandemic recovery has made capital scarce, with equity financings declining from $11.9B in 2016 to just $722M in 2020. Capital markets have also been affected by ESG concerns. While some operators see opportunity in the growing global focus on carbon, it's important to remember that energy transition will take time.
Managing operational risk
The pandemic pushed operators into survival mode, observes Narmin Vasanji, Partner, Advisory Services, Management Consulting. As a result, many were forced to find operational efficiencies through digital transformation as operators transitioned to working from home. Now, operators are starting to see technology and automation as a competitive advantage, with particular focus on shifting enterprise resource planning (ERP) software to the cloud and finding efficiencies through automating financial processes.
Atin Prakash, Senior Manager, Global Sustainability Services, notes that the pandemic has seen ESG move into the mainstream and become integrated into financial risk management. There's growing awareness that diversity and inclusion leads to better-governed companies that are more adaptable and able to make better decisions.
Shesta Babar, Director, Advisory Services, People & Change, highlights the uncertainty caused by a 20% reduction in jobs between February and May 2020, digital transition, a growing focus on ESG and the abrupt shift to working from home. Once business processes stabilized, however, oil and gas companies focused on retaining and attracting talent. Now, the main areas of focus are climate change and digital transformation, with the latter leading to a new demand for data scientists.
Tackling the energy transition
In light of the expectation that companies will achieve net zero emissions by 2050, observes Michael McKerracher, it's essential that companies assess how they will meet that pledge. The demand for oil and gas will continue for decades to come, and to be sustainable in the long term, companies will need to manage cash flow while also cutting emissions. Success will depend on how companies build transition plans into their business strategies, and meaningful emissions reductions into their operations. And while some companies may turn to investments in wind or solar, moving away from the core business of producing oil or gas may not be the best strategy overall for Canadian oil and gas operators.
"The worst is over," says Michael McKerracher, and the economy is starting to recover.
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