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The new normal in oilsands project development may be a more even pace

Alberta Supply Chain Working Group wants owner/vendor relations to be less adversarial

International EPCs see great opportunity in acquiring Alberta players

KBR Industrial Canada builds sophistication atop its long oilsands history

Currency

exchangeEncouraged by bright oilsands forecasts, multinational engineering firms are shopping for Canadian acquisitions

By Jim Bentein

W hy would multinational engineering firms

from countries as far away as australia and switzerland be interested in buying out small alberta businesses? larry staples has a theory.

“alberta is one of the most engineering-rich jurisdictions in the world,” says the Construction Owners association of alberta spokesman. “if you look at the u.s., you’ll see the nationalaverage is two professional engineers per 1,000 people. Meanwhile, in Canada, it is six to seven per 1,000, and in alberta it’s 17 per 1,000.”

and that doesn’t even include the engineering technologists. The association of science and engineering Technology Professionals of alberta has a membership of 18,000, while the association of Professional engineers and Geoscientists of alberta has more than 50,000

members, with another 10,000 student members. staples sug-gests there are about 80,000 engineers and technologists in the province.

However, this abundance of engineers only partly explains why multinationals are increas-ingly interested in small- and mid-sized Canadian engineering, procurement and construc-tion (ePC) companies. analysts covering the sector point to a combination of factors: record-low interest rates, strong balance sheets at the big international firms, and the ever-present need

to grow and diversify in terms of both business segments and geography. and with long-term growth prospects for the oilsands industry looking good, the take-overs are expected to continue.

as a vice-president and senior infrastructure and industrials analyst with dundee Capital Markets inc., Maxim sytchev is one of the few analysts special-izing in coverage of the Canadian ePC space. He believes Canada’s reputation as a politically and il

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economically stable country has also played a role in driving billions of dollars of investment towards ePC companies focused on the oilsands and energy.

“relative to south america or other parts of the world, Canada is a safe location, politically and economically,” he says.

ePC companies with an oilsands and energy focus have been able to grow their businesses impressively over the last several years, as producers spend billions on new projects. But for many multi-nationals, it’s the prospect of ongoing contracts that has led to their increasing interest in Canadian firms.

“Oilsands maintenance [repair and operations, or MrO] is now close to $20 billion a year, which eclipses the investment in green-field projects,” sytchev says. “There is a colossal amount of ongoing spending associated with these projects.”

busy buyersThe list of takeovers over the last eight years is long. in august, australian ePC company ausenco limited, which has 3,300 employ-ees in 30 offices worldwide, purchased steam assisted gravity drain-age (saGd) engineering specialty firm PrOJeX Technologies ltd. for $15.2 million. Based out of Calgary and Halifax, the privately owned company of about 220 people was bought specifically because of its oilsands expertise. ausenco says that the acquisition also comple-ments its $3.8-million purchase of an even smaller Calgary ePC company, reaction Consulting inc., in 2012.

ausenco chief executive officer Zimi Meka says the purchases are aimed at helping the company diversify beyond its concentration on the mining sector.

“We remain committed to growing our energy revenues, both organically and through further acquisitions that enhance our global

solutions offering to our clients,” he said in a press release. He goes on to note predictions that oilsands production is expected to more than double by 2022, with capital spending also forecast to jump from $20.4 billion to $23.4 billion per year by 2015.

in November of 2012, swiss engineering giant foster Wheeler aG purchased Calgary-based Three streams engineering ltd. for an undisclosed sum. an ePC management company with upstream and downstream projects, Three streams has a particular focus on saGd oilsands projects. at the time of the sale, the company employed 450 people, compared to foster Wheeler’s staff of 13,000.

in fall 2012, China Huanqiu Contracting & engineering Corp. (HQC) completed a share purchase agreement with spec engineering inc., a Calgary-based engineering, procurement and construction management (ePCM) firm founded in 2004 with a focus on heavy oil processing, cyclic steam stimulation and saGd. HQC is affiliated with China National Petroleum Corporation.

Going back a few years, in March 2008 Production services Network ltd. (PsN) acquired private Calgary-based ePCM Tartan engineering ltd., providing a foothold for the international company in western Canada’s highly appealing energy business environment.

“establishing a presence in this market is critical to PsN’s global strat-egy,” ali Green, PsN’s business development director, said at the time.

in 2007, aberdeen, scotland–based Wood Group PlC purchased Calgary-based saGd ePC iMV Corporation for $131 million, and in 2011 Wood Group merged with PsN, creating a significant force in oilsands engineering. in mid-september, iMV, Wood Group PsN Canada and Mustang Canada launched a new merged venture called Wood Group Mustang, to offer “expanded and enhanced” ePCM services. The move further builds the global firm’s operations in Canada.

EPC companies with an oilsands and energy focus have been able to grow business impressively over the last several years as producers spend billions on new projects, and global EPC players are capitalizing on the opportunity.

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it isn’t just Canadian ePC companies that are sought after, ac-cording to sytchev, who points to dozens of takeovers in the oilfield service area as well. The latest involves alberta’s Big Country energy services lP, which specializes in pipeline construction. florida-based MasTec inc., which designs and builds pipelines, power plants and communications infrastructure, announced in June it was buy-ing the company for $103 million.

promising signsin mid-august, financial pages across the continent were buzzing with news that Berkshire Hathaway inc.—the investment firm headed by u.s. billionaire Warren Buffett—had purchased 17.8 million shares in suncor energy inc. valued at $524 million. The message to the mar-kets was clear: smart investors believe the oilsands has a bright future.

Other promising signs abound, sytchev says. The differential between heavy oil and bitumen and light oil is narrowing, while crude-by-rail projects and other initiatives are aimed at transporting more oilsands crude to markets. for example, TransCanada Corporation re-cently announced plans to convert its existing natural gas mainline and add new pipe as part of the energy east Pipeline Project, which could move 1.1 million barrels of crude daily from alberta to eastern Canada.

sytchev says this flurry of activity shows that engineering and oilfield service firms, along with the energy industry overall, have recovered from the deep 2008 recession. With interest rates low and many larger firms carrying little debt, businesses can borrow money to make acquisitions that are quickly accretive to their revenue and earnings.

all of these factors are encouraging the global ePC players to get involved in Canada, according to the analyst.

“The boards of directors are looking at the strength of balance sheets in the industry and they are wanting to spend money,” sytchev says. “do they spend it to buy their own stock [to push up share prices of publicly listed companies] or do they push up top-line growth? right now companies are looking to scale up [by making acquisitions].”

in addition to the opportunities offered by the oilsands, global players are also attracted by the prospect of liquefied natural gas (lNG) export projects being built on the B.C. coast.

“They are very complex, costly projects,” he says.However, not every multinational is foreign to Canada. sytchev

notes that some of the companies looking at acquisitions are based out of Canada, and he points to two edmonton organizations as examples. engineering giant stantec inc., which has 12,000 people on staff, makes five or six acquisitions a year on average. PCl Constructors inc.—with over 10,000 employees, one of Canada’s lar-gest general contracting firms—is also always on the acquisition trail.

Montreal-based sNC-lavalin Group inc. has also made public its interest in using acquisitions to expand its oil and gas business. The company has 5,500 people in its oil and gas division, with 800 of those in alberta, and there are plans underway to increase those figures.

THe neXT WaveKevin O’Brien knows about takeovers of Canadian engineering companies by multinationals from personal experience. He was an executive with Calgary-based iMV Corporation during the Wood Group purchase in 2007, and served as president of Wood Group’s iMV Projects division until the launch of Wood Group Mustang. When Wood Group purchased iMV, the larger firm had 22,000 employees in 46 countries. iMV had 650 employees. www.ExpressGroupHoldings.comwww.ExpressGroupHoldings.com

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Now serving as regional director, Canada for Wood Group Mustang, O’Brien says the Wood Group acquisition went so well that all of the iMV senior managers remained with the company. “With the exception of a few who have since retired, most of the manage-ment team stayed with the company,” he observes.

in particular, engineers and technical people at the former iMV—including O’Brien himself, who holds an engineering de-gree—appreciate having access to the resources a multinational firm can provide.

“Wood Group generates $7 billion a year in revenue and has 43,000 employees in 50 countries,” he says. “Calgary is a centre of oil and gas engineering excellence, but it is an expensive city in which to operate. Now we can send work packages [to lower-cost Wood offices] in Houston, or Bogota, [Colombia] or Kuala lumpur, [Malaysia].”

He says Wood Group gives its divisions a large degree of operat-ing autonomy, which also made the transition less challenging for employees. Between the original acquisition in 2007 and the Wood Group Mustang launch this fall, the iMV division had grown to 800 staffers in Calgary, where the company employs a number of engin-eers and technologists on designing saGd, natural gas processing facilities and pipelines.

Takeovers by multinationals “seem to come in waves,” O’Brien says. The purchase of his company was one of several major ac-quisitions that occurred prior to the 2008 recession. for example, australia’s Worley Parsons ltd. bought Colt Companies, a project services company involved in many of the same areas as iMV, for us$883 million in 2007.

There are, however, exceptions to the apparent trend of multination-als swallowing independent firms. One of those exceptions is Calgary-based engineering and procurement company Vista Projects limited, which was founded in 1985 and is determined to remain independent.

Vista chief operating officer richard Campbell, the son of founder and chief executive officer alex Campbell, puts succinctly what the 400-plus-employee company’s plans are regarding any future takeover offers.

“There have been many offers to sell our business, and we have chosen not to pursue that route,” he says. “Our focus is on western Canada and our goal is to remain privately and locally owned.”

Vista specializes in the design of saGd projects.Campbell says Vista’s shareholder team made the decision several

years ago to maintain their independence and to offer leaders owner-ship opportunities in the firm. That has allowed it to keep and attract key employees.

“We now have 34 shareholders in the company,” he says.The approach has worked because Vista currently works for many

of the larger oilsands operators and has experienced considerable growth in recent years. it has grown from about 100 employees five years ago to over 400 now.

exceptions aside, the next wave of engineering mergers and acquisitions may already be coming. The long-term growth prospects of the oilsands, the ongoing MrO opportunities and lNG-related opportunities have already begun to lure multinationals back to the country after the recession temporarily halted takeovers. even with 80,000 engineers and technologists in alberta, now might be a good time to consider that engineering degree.

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