Following a trend of consolidation across the oil and gas sector, one prominent energy investor points to key differences between the U.S. and Canadian industries. 

On Monday, Diamondback Energy Inc. agreed to buy Endeavor Energy Resources LP in a US$26-billion deal, following other high-profile acquisitions in the sector. Eric Nuttall, partner and senior portfolio manager at Ninepoint Partners, said in an interview with BNN Bloomberg on Tuesday that merger and acquisition deals in the energy sector are generally driven by one of two problems. 

“One is a weak balance sheet. You have too much debt, you buy somebody with a better balance sheet, you instantly delever. Secondly, you have an inventory problem, meaning you either don't have enough of it or the quality of what you have is eroding,” he said. 

Nuttall added that inventory issues have become more common in the U.S. 

“We're more than ten years into the ascent of U.S. shale production. We're seeing two of the major three basins mature (and) production flat line into declining (inventories),” he said. 

Within the Canadian oil and gas industry, Nuttall said merger and acquisition deals have largely been Canadian producers acquiring assets from foreign firms. He added that within the Canadian sector, issues relating to balance sheets and inventory depth are less prevalent compared to the U.S. 

“Balance sheets today in Canada are their strongest in history. So balance sheet strength, not a challenge,” Nuttall said. 

“Inventory depth, we have many companies with 20, 30, 40 years of stay flat inventory. So a very, very stark contrast to what we see in the U.S. Hence there is going to be a growing strategic value to these assets, because not only do we have a lot of years of production, but our decline rate, meaning the amount of production that we lose, is a lot less.” 

However, Nuttall said there are areas of the Canadian energy industry that could face consolidation, specifically companies operating in the Clearwater region. 

“There are companies with high-quality assets where management has struggled and you could see strong synergies combining there,” he said.