Canadian M&A Perspectives Ryder Scott Canada – Annual Reserves Conference May 10, 2016 TECHNICAL PIONEER AND Scotia Waterous GLOBAL LEADER IN OIL AND GAS M&A AUSTRALIA BAHAMAS BRAZIL CANADA CHILE CHINA COLOMBIA DUBAI FRANCE HONG KONG INDIA IRELANDJAPAN KOREA MALAYSIAMEXICO PERU SINGAPORE TAIWAN THAILAND UNITED KINGDOM UNITED STATES Scotia Waterous Scotia Waterous is the leading technically-focused upstream investment banking and M&A advisory firm, with global offices in Houston, London, Calgary and Hong Kong • Unrivalled market intelligence from conducting ~50 M&A mandates per year globally London Calgary Houston Hong Kong Scotiabank Oil & Gas Offices 1 Canadian M&A Perspectives – Where are all the deals?? 1. Setting the Scene – Macro Environment 2. Canadian M&A Market Update 3. Outlook – 2016 and Beyond Appendix I. M&A&D Activity II. Comparable Valuation Analysis 2 Setting the Scene – Macro Environment Section 1 The Canadian Energy Environment Today “Loonie surges to nine-month high as commodity prices add on gains” April 20, 2016 “Oil jumps despite glut, hits 2016 peaks on weak dollar” April 28, 2016 “Forget Justin Trudeau, it’s oil that’s driving this loonie rally” April 28, 2016 “Premier Rachel Notley talks carbon tax” March 3, 2016 “How Hillary Clinton’s tone has shifted on fracking” April 14, 2016 “TransCanada Fights Keystone Denial With $15 Billion Appeal” January 6, 2016 “Oil and gas sector says investment will drop by $50B” April 7, 2016 “Alberta sets out details for new oil and gas royalty framework” April 21, 2016 4 Significant E&P Job Cuts… First Announcement Second Announcement # of Jobs Lost Dates Announced # of Jobs Lost Dates Announced Companies (employees) (dates) (employees) (dates) 1,500 July 28, 2015 7,000 October 30, 2015 200 March 18, 2015 1,810 September 01, 2015 4,000 January 12, 2016 3,000 February 02, 2016 2,000 February 13, 2015 1,500 June 16, 2015 6,500 January 09, 2015 1,700 January 13, 2015 250 January 14, 2015 200 November 06, 2015 1,400 October 30, 2015 500 February 09, 2016 700 July 30, 2015 200 October 28, 2015 1,000 February 16, 2016 Total 20,150 13,310 and more…. +33,460 Total! Source: Press releases 5 …and Material Capital Budget Reductions Generally larger capital reductions in North America • Over US$250 Billion decrease in capital investment since 2014 Capital Expenditure(1)(2) US$ Billion $250 Mid Cap & Small Cap Large Cap $200 (63)% or ($149B) $150 (30)% or ($43B) $100 (37)% or ($27B) (66)% or $50 ($36B) $0 2014A 2016E 2014A 2016E 2014A 2016E 2014A 2016E (1) (2) Source: FactSet (1) U.S. small and mid-caps defined as ≤ $25 B as at June 2014 (2) Canada mid-caps defined as ≤ $10 B as at June 2014 6 Cycle Times and Payout • Length of time from first capex to first production (“Cycle Time”) of large projects is longer • Shale / “Resource Play” development has changed the elasticity of supply in North America and globally – Production from large developments to be replaced over time by shale Payout Period vs. Cycle Time Years | Years 16 LONG PAYOUT LONG CYCLE TIME Rosebank 14 EXPLORATION, APPRAISAL, Libra PRE-FEED / FEED, 12 CONSTRUCTION (DELAYS?) COMMISSIONING, CASH FLOW 10 Johan Castberg Tupi Northeast 8 SHORT PAYOUT Johan Sverdrup SHORT CYCLE Nsiko and Aparo Payout Period 6 TIME (OML 140) DRILL, COMPLETE, 4 Permian EQUIP and TIE IN Bakken 2 Eagle Ford Montney Viking 0 0123456 Source: Wood Mackenzie, Scotiabank Cycle Time 7 Market Themes Overall market remains highly volatile given economic and commodity price uncertainty • Energy sector has been the weakest performing sub-sector in the S&P TSX until recent rally • Government changes have become a secondary concern • Higher cost of capital for public companies (improving recently) Well capitalized companies have outperformed • Heavy investor focus on leverage levels, funding and sustainability Investor flight to size, liquidity and safety • Larger companies have outperformed 8 E&P Outlook – Scotiabank CAPP Investment Symposium Takeaways 1• Tempered optimism on a price recovery • General view that the bottom may have been in late January/early February, but price recovery will be volatile 2• Companies remain conservative with primary focus on protecting the balance sheet; will be slower to increase drilling in response to increased prices • Pipeline and related infrastructure remain key to getting Canadian oil & gas to foreign markets • View that all stakeholders must work together to get Canadians on board for Energy East or other important pipeline projects 3• M&A market may cautiously increase as the year continues • General view that bid-ask spreads remain high, preventing a lot of transactions from being finalized • Stability/gradual increase in underlying prices will help buyers/sellers align on value and complete deals • Strong demand for high netback, positive IRR opportunities; little demand for other assets 4• Natural gas pricing remains challenged • Strong production across North America putting a significant damper on prices in the near term • No clarity on LNG projects with FID being deferred for major west coast LNG projects 9 Enterprise Value by Region Value lost is across the globe Enterprise Value at June 1, 2014 Current Enterprise Value(1) Total Enterprise Value: US$4,550 billion Total Enterprise Value: US$3,262 billion WTI – US$102.43/bbl WTI – US$45.99/bbl (55%) 2.8% 7.0% 1.6% 2.7%1.4% 6.0% 8.8% 31.4% 8.2% 34.7% US$1,288 9.0% billion of value 9.6% lost (28% decline) 15.3% 15.3% 22.0% 24.2% • Canadian E&P equity value has decreased by ~C$157 B since July 1, 2014 – ~C$27 B since July 1, 2015 Source: FactSet (1) As of April 29, 2016 10 North American Share Price Performance By Size Category(1) North American E&P equity markets have experienced a flight to size and liquidity Price Performance (July 1, 2014 – Present) Price Performance (July 1, 2015 – Present) Return (%) Return (%) Canada U.S. Canada U.S. 0% 0% (6%) (25%) (25%) (12%) (23%) (28%) (28%) (30%) (33%) (33%) (36%) (50%) (50%) (38%) (47%) (51%) (57%) (59%) (60%) (75%) (75%) (67%) (100%) (100%) Global Large Large Cap Mid Cap Small Cap Global Large Large Cap Mid Cap Small Cap Cap Cap (Over $30B) ($10B to $30B) ($1B to $10B) (Under $1B) (Over $30B) ($10B to $30B) ($1B to $10B) (Under $1B) Number of 5 14 6 13 29 37 9 12 Companies: 5 14 6 13 29 37 9 12 Source: FactSet as of April 29, 2016 (1) Size criteria classified by EV as at July 1, 2014 11 TSX: Broad Market Performance The energy sector has been among the weakest performing sub-sectors on the TSX, but has recovered slightly in early 2016 S&P TSX Sector Performance S&P TSX Sector Performance July 1, 2014 – Present January 1, 2016 – Present Consumer Staples 51% Materials 43% Information Technology 29% Energy 14% Telecom Services 16% S&P/TSX Composite 7% Real Estate 15% Utilities 7% Consumer Discretionary 14% Telecom Services 7% Utilities 3% Financials 5% Financials 2% Industrials 4% Industrials (1%) Real Estate 3% S&P/TSX Composite (8%) Consumer Staples 1% Materials (13%) Consumer Discretionary 1% (7%) Paper and Forest Products (18%) Information Technology Energy (34%) Paper and Forest Products (17%) Health Care (59%) Health Care (62%) (75%) (50%) (25%) 0% 25% 50% 75% (75%) (50%) (25%) 0% 25% 50% Source: FactSet as of April 29, 2016 12 Canadian E&P Market Capitalization Current Market Capitalization C$ Billions Under $1B $1B to $10B $10B to $30B Over $30B Market Cap. @ Jul. 1, 2014 $67 • Canadian E&P equity value has decreased by ~C$157 B since July 1, 2014 $60 – ~C$27 B since July 1, 2015 Change in Sector Market Capitalization $50 • Top 6 companies Company Current (C$B) July 1, 2014 (C$B) represent ~72% Suncor Energy $58 $67 $40 of total Canadian equity Imperial Oil $41 $54 Canadian Natural Resources $36 $48 value Husky Energy $17 $26 Cenovus Energy $16 $34 $30 – July 2014: ~61% Crescent Point Energy $11 $20 Top Six Canadian E&P $178 $248 Total Canadian E&P $249 $405 $20 Total Canadian E&P Total Top Six Equity Value Decrease $157 $70 $10 $0 > RMP Energy Inc. Energy RMP Crew Energy Inc. Surge Energy Inc.Surge Energy Husky Energy Inc. MEG Energy Corp. Suncor Energy Inc. Imperial Oil Limited Oil Imperial NuVista Energy Ltd. NuVista Encana Corporation Kelt Exploration Ltd. Delphi Corp. Energy Cardinal Energy Ltd. Energy Cardinal ARC Resources Ltd. Birchcliff Energy Ltd. TrilogyCorp. Energy Baytex Energy Corp. Tourmaline Oil Oil Corp.Tourmaline Cenovus Energy Inc. Cenovus Energy TORC Oil & Gas Ltd. Oil & Gas TORC Pine Pine Cliff Energy Ltd. Enerplus Corporation Vermilion Energy Inc. Spartan Energy Corp. Storm Resources Ltd. PrairieSky Royalty Ltd Bonterra Energy Corp. Twin Butte Ltd. Energy SunshineLtd. Oilsands Freehold Royalties Ltd. Freehold Royalties Bellatrix Exploration Ltd. Whitecap Resources Inc. Advantage Oil & Gas Ltd. Long Run Exploration Ltd.Exploration Run Long Penn West Petroleum Ltd. Penn West Petroleum Athabasca Oil Corporation BlackPearl Resources Inc. Lightstream ResourcesLtd. Canadian Canadian Oil Sands Limited Paramount Resources Ltd. Crescent Point Energy Corp. Crescent Tamarack Valley Energy Ltd. Raging RiverRaging Exploration Inc. Painted Pony Petroleum Petroleum PonyPainted Ltd. Bonavista Energy Corporation Pengrowth Energy Corporation Northern Blizzard Resources Inc Seven Generations Energy Ltd. Canadian Natural ResourcesCanadian Natural Limited Peyto Exploration & Development Corp. > $10 - $ 1 Market - < Cap $30 $30 $ 10 $ 1 B Source: FactSet as of April 29, 2016; Current Total Canadian E&P adjusted for value of companies that had an IPO during the period; Company Screen: Excludes Trust