BMO Capital Markets / May 2023 / Energy Focus

BMO CAPITAL MARKETS

BMO CAPITAL MARKETS

Powering Canada’s Balanced Energy Transition

One of the largest banks in North America, BMO is working hard to position itself, and the business of its clients, on a path towards net zero, as a leading advisor in merger, acquisition, and divestiture activity for energy assets. A key goal is to position Canada as a globally leading partner for energy importers.

PRODUCTION: Sam Hendricks

INDUSTRY FOCUS: FINANCE

Rich in nature, the second largest country in the world, heavily exposed to adverse climate impact such as flooding and wildfire, Canada is an advocate of the global energy transition. Shifting from fossil fuels to renewable energy sources to reduce CO2 emissions and limit global temperature increases, the country is ambitious, aiming for greenhouse gas emissions reductions

of 40 45% by 2030 from 2005 levels, and to reach net zero emissions by 2050. The diverse plan to achieve these goals includes major policy changes such as a modern carbon pricing system, clean fuel legislation, commitments to phase out unabated coal use in the next seven years, nuclear plant expansions, upstream methane regulations, energy efficiency programmes, and decarbonising

activity in the transport sector.

Of course, like everywhere else in the world, these targets and concepts require funding. Not just grants and subsidies, but monumental financial figures – Deloitte predicts 6% of GDP. There will also be significant M&A activity as the majors look to align with the journey. Acquisition and divestiture activity will increase, and the requirement for stringent review and advice will be significant.

The story of Denmark’s Ørsted is perhaps the most famous organisational transition, taking a decade to shift entirely away from coal and conventional generation, becoming the world leader in offshore wind and delivering financial results that surpassed the expectations of most. Initially, the aim was to upend the generation mix from 85% conventional and 15% renewable to 85% renewable over a 50-year period. After just 10, the business has achieved its goal and is continuing to invest in green energy all over the world.

BUSY BUSINESS

For Canada, significant deals have been done in recent times. Supporting the health of the North American economy, working closely with its big neighbour, the USA, the country is a hive of transactional activity.

In 2019, Shell Canada Energy sold its Foothills Assets – Waterton, Jumping Pound and Caroline gas plants, associated wells and pipelines and the gas fields which feed them – to Pieridae Alberta Production Ltd. In the same year, Devon Energy Corp sold its Canadian business to Canadian Natural Resources Limited for CAD $3.8 billion. In Imperial Oil and ExxonMobil Canada agreed to sell their Montney and Duvernay shale oil and gas assets to Whitecap Resources in a $1.47bn deal. TotalEnergies also announced that it planned to sell its interests in Alberta-based, Suncor Energy-operated Fort Hills mining project, and the ConocoPhillipsoperated Surmont thermal project, alongside associated midstream and trading-related activities.

To complete these types of transactions, banks must understand the environment. thankfully, Canada’s leader – BMO (Bank of Montreal) –has decades of experience in A&D for the energy sector, and the bank has taken a balanced approach to benefit the future clean vision for the country as well as the interests of its clients. In 2017, the company was hired by Petronas to sell oil and gas drilling rights, wells, pipelines and three gas processing plants mainly located in north-western Alberta.

Last year, Cheryl Sandercock –Co-Head, Energy A&D Advisory and a Managing Director in BMO Capital Markets – told Energy Focus that the company had fantastic people power internally and was the obvious choice for large, complex sales. “Our team members are predominantly technical specialists, including geologists and engineers, who understand the energy assets and technical aspects related to owning and operating these assets.

“Banks have an important role

to play helping our clients manage the impact of the energy transition on their business. Helping our clients adapt and thrive through the coming transition requires a thoughtful, balanced, and accelerated approach.

“In an environment as volatile as today’s energy market, we act as that experienced advisor helping our clients get the results they want.”

Today, the market is even more unpredictable and with the transition becoming a core element in company and country strategy, impartial advice is hard to come by. Dan Barclay - Chief Executive Officer of BMO Capital Markets says that this major change should be viewed as an opportunity and be carefully managed to achieve business growth and sustainable environmental success.

“It’s encouraging just how much the climate change narrative has evolved in the last few years,” he says. “Climate change is an integral part

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In a global energy crisis, with markets unpredictable and uncertain, divestiture activity must be safe and secure, and data must be valid and trustworthy. Oil Finders clips into transactions for investment banks and majors to consult on the science and security behind the deal.

Oil Finders is the Canada-based provider of transactional support in significant asset divestiture, utilising secure data rooms and seismic knowledge to safeguard deals for clients. Founder and President, Todd Knight explains that now is an essential time for banks to obtain experienced guidance and support from proven industry professionals. “The industry is still in something of a recovery mode,” he says. “People are getting back to work but cautiously, and finances are tight. Banks are not as open to lending as they were in the past, and the oil companies are building funds to pay back shareholders.

“My job is a lot about encouraging what they should do rather than what they shouldn’t. We ensure that the data that will be reviewed is focussed on the property. Sometimes when a bank gets a project from an oil company, the data is scattered and there is a broad focus around the land that is being sold. That isn’t great as people that may view might have land in other places, and they can be distracted by data that isn’t focussed on the primary property that is being sold. It’s about bringing focus to the project and ensuring reviewers spend time on what is valuable.”

As the global energy transition continues, the market for buying and selling major oil plays remains hot. There was a brief slowdown through 2020 and 2021 as the industry took stock and re-strategized to ensure long-term sustainability. But now, investment banks and private companies are busy as O&G asset holders streamline portfolios.

In international markets, sales have been buoyant with most of the world’s majors active in multi-milliondollar transactions since 2021. But when buyers come to the table it is essential to keep them there and get transactions over the line. To achieve this, a clear and concise display of information and a scientific review of what is on offer is critical.

From bases in Calgary and Ontario, Oil Finders details geoscientific information using specialist software, in highly-secure data rooms, leaving no stone unturned so that clients - including BMO Capital Markets, ExxonMobil, Shell, and more – can understand true value.

“In our world, where it involves seismic – looking for upside – it’s not just about pools. When they involve us, it is not just about buying a pool of oil, it’s about making sure the wells are high quality. We have increasingly become the go-to for divestures around the world where seismic shows the value,” Knight adds.

“I use industry standard software and work closely with bank directors,” he says, highlighting the simplicity of his offering for end users. “We are busy with a number of significant projects right now. We get involved in some of the largest oil plays in the world and some are quite famous in the marketplace. Often, owners are looking

Todd Knight | President, Geophysicist

Data rooms that travel so you don’t

Unlocking Deep Potential in Energy Deals

to spin off assets in the vicinity of major discoveries to reduce their own risk. These wells can be more than $100 million to drill and farming down to reduce risk is a very good idea.”

The expertise within Oil Finders can help to swing deal values by up to 10%. Right now, that is significant and achieving this can make a big difference in financial results. Returning clients have commented: “He’s very expensive, but worth it, because everything just works.” As activity continues to boom, Knight is keen on international work alongside clients.

“There is a lot of exploration going on and we are hearing a lot about developing markets finding oil and gas plays, and that is exciting. In the last decade, oil assets have been purchased for production purposes as opposed to upside. Now, we are getting back to exploration and new drilling, and that involves seismic and that is also exciting.”

Happy clients highlight the combination of science and technology as particularly appealing: “With Knight we get a more experienced geophysicist, software, hardware, and security, and that’s worth a lot to us.”

Even through the energy transition, the geoscientific nature behind Oil Finders remains highly attractive when clipping into bank transactions, anywhere in the world. Knight remains confident that the company’s insight will be required.

“We will do well helping players transition from one sector to another. If companies decide they are going to evaluate their portfolio and dive further into wind or solar, they will need to spin off oil and gas and that brings opportunities.”

But this will likely happen over a much longer period.

“It is now clearer for those that have rushed into the energy transition that oil and gas is the backbone of the system and it will be around for many years,” he says. “As the problems in Europe have highlighted, oil and gas are very strongly required elements in the economy.

“If you look back at any of the sources that mankind has made through the years, it is a transition to more and more complex energy. Each jump has involved

more knowledge and more technology. Wood, coal, oil, gas, nuclear, and next will be hydrogen as an energy carrier, have all required fresh ideas and deep new understanding. No energy source that mankind has ever developed has diminished in use. We are using as much or more of every source from wood to hydrogen. Oil and gas usage will not diminish. It is likely to stay where it is or increase, and that is the stage we’re at now – many think it will increase because of the rate of population increase.”

Consultancy around this, and delivery of straightforward easy to decipher scientific information, is where Oil Finders finds its niche. “Geophysicists should be exploring for oil and gas – that is what they are paid to do. They shouldn’t be getting involved with data rooms – that is not their specialty. When they get in with reviewers, they might talk too much about the sale, giving a certain impression that might not help in a sale. You have to be careful about what is said during a review of a large oil and gas asset and that is where we are successful.”

The quality service levels within Oil Finders are unquestionable and, in a challenging market characterised by uncertainty, the merit of partnering is clear. The company brings certainty around data, assurance in value, and confidence in transactions.

INDUSTRY FOCUS: FINANCE

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of the conversations we have with our clients, and I can confidently say that it’s part of the agenda for every CEO and clients that I know.

“To reach net zero by 2050, to get sufficient capital to the table, how we get there needs to be targeted, policy driven, accelerated and above all practical.”

He adds that the transition activity must be exactly that – activity. There cannot be an immediate halt of all long-established motion but an appealing and valuable path forward. “The reality is that the global economy will only reach net zero by 2050 if investment themes that have the highest impact on GHG reductions promote economic growth and allow private capital to flow are prioritised. We need to focus our efforts on generating more clean energy and reducing

emissions for carbon intensive sectors with the biggest near-term impact.”

He is also clear on the fact that oil and gas companies cannot drive the transition alone and there must be multi-industry, multi-sector, and multinational approach. “Partnering together, the financial sector and government can show people and businesses why it’s worth taking the risk of changing how their produce or consumer energy, or both. The shape of the energy transition is not binary. It’s an ‘and’ rather than an ‘either/or’ conversation.”

JUST TRANSITION

Thankfully, with support from important global organisations including the U.N., World Economic Forum, the International Renewable Energy Agency, and more, the realisation that the transition is a long-term project is hitting home. Of course,

more action must be taken, but the mindset of ‘stop one, start another, immediately’ is being adjusted.

“The narrative pendulum has swung back to talk of a sensible and just transition and away from calls for the world to just turn off fossil fuel,” says Barclay. “We need to focus on what it takes to achieve an orderly transition, meeting the needs of today while achieving a sustainable future. We’re aligned on the goal, let’s chart the course and get on with it.”

To do this, BMO has two essential initiatives amongst a raft of clean energy offerings. Firstly, the clean energy index ETF – designed to replicate, to the extent possible, the performance of the S&P Global Clean Energy Index, net of expenses. The Fund has a high exposure to the theme of clean energy by investing in companies that are involved in clean energy related businesses.

“Most investors think that energy companies must be excluded rom responsible investment products given the impact the environment, however there are energy companies that are working to transition their businesses and lessen their carbon footprint which are worthy of consideration,” says Erin Allen, Senior Product Manager, BMO Global Asset Management.

“The transition has created an opportunity for investors to invest in energy companies that are leading the green energy revolution. BMO’s clean energy index ETF (ZCLN) gives you exposure to clean energy companies globally that are at the forefront on innovation.”

The company is also a big backer of clean Canadian energy, and efficient fossil fuel production as part of the transition, positioning the country as a global leader as governments seek new relationships with Russia out of the equation. After announcing a winddown on US oil and gas lending in 2020, BMO promised to reduce scope 1 and 2 emissions from its oil and gas borrowers by 33%. But the technological and innovative approach in place across

many Canadian operations make it a fantastic choice for those seeking sustainable O&G partnerships.

“As the world reassesses reliance on Russian energy and looks for alternatives, nations risk repeating the same mistakes: Sourcing energy from countries with troubled human-rights records, potentially reversing course on their energy-transition goals or risking the instability that would come from blanket divestment,” says Darryl White - Chief Executive Officer, BMO Financial Group. “The future of global energy security will be won by nations that can provide ethical and sustainable sources of energy production. That makes Canada – a major oil and gas producer with significant investment in emissions-reducing technology, while also being a pluralistic democracy and a defender of human rights –exceptionally well-positioned to lead.”

He highlights a recent report from the bank which confirms the country’s strong standing.

“A 2019 study of major oilproducing nations by BMO Capital Markets examining the full spectrum of important environmental, social and governance concerns identified Canada as the clear overall leader. Given significant R&D investment since the study, the case for Canada is even clearer today.

“Canadian energy companies have led global investment in

technology since 2010, totalling more than $13.1-billion. This leading R&D position has meant that the average reported emissions intensity of Canada’s large cap oil producers fell about 25% since 2013,” he adds.

Canada’s wider environmental strategy involved protecting at least 25% of land and water by 2025. Today, almost 2.2 million km2 is under official protection order, and boasts a quarter of the earth’s wetlands, temperate rainforests and boreal forests, alongside 20% of its fresh water and the longest coastline in the world. plainly, the country is reliant on its natural resources and realises the importance of sustainable development.

Brad Wells, Head of Energy at BMO Capital Markets, highlights the company’s understanding of the unique position of Canada, and agrees with White that the country must aim to become an example for all.

“Today, we’re at a pivotal

moment… we have the opportunity to position Canada as a global leader in secure, affordable and responsiblyproduced energy. This ambition will require investment, innovation and collaboration. Energy is a sector that we have long partnered with, served and remain committed to today.

“We have to be focused on meeting the energy and economic needs of today and doing what it takes to create a low-carbon economy now and into the future.”

BMO is perfectly positioned to assist clients and compatriots in their energy transition journey. Whether that is buying or selling oil plays, or attracting investment for renewable projects, the organisation is a fullservice financial services provider with a portfolio that rivals the world’s best.

// TODAY, WE’RE AT A PIVOTAL MOMENT… WE HAVE THE OPPORTUNITY TO POSITION CANADA AS A GLOBAL LEADER IN SECURE, AFFORDABLE AND RESPONSIBLYPRODUCED ENERGY //

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