Despite a few high-profile M&A deals this year, Canada’s oil and gas industry is likely to see slow and steady dealmaking, in contrast to the more active US market, two sector lawyers said.

Since the start of the year, there have been a handful of billion-dollar-plus deals in Canada, including Crescent Point Energy’s [TSX:CPG] CAD 1.7bn (USD 1.24bn) acquisition of Spartan Delta’s [TSX.V:SDE] oil field assets in northwestern Alberta, ConocoPhillips’ [NYSE:COP] USD 3.3bn purchase of TotalEnergies’ [NYSE:TOT] Surmont oil sands project, Suncor Energy’s [NYSE:SU] USD 1.47bn acquisition of Total’s stake in the Fort Hills oil sands mine, and Tourmaline Oil’s [TSX:TOU] acquisition of privately held Bonavista Energy for CAD 1.45bn.

But unlike in the US, where Exxon Mobil’s [NYSE:XOM] USD 59.5bn agreement to acquire Pioneer Natural Resources [NYSE:PXD] has set off an M&A frenzy in the Permian basin, there is little space for additional dealmaking in Canada’s oil and gas industry, noted Keith Chatwin, partner and head of the Calgary corporate group at Stikeman Elliott. “In the Canadian space… we don’t have an environment that accommodates that much M&A activity anymore,” he said. “The bigs can get bigger but there are not a lot of small- to mid-sized corporations anymore. That space has been greatly depleted over the last decade.”

The number of listed oil and gas companies based in Alberta – Canada’s oil-rich province – has decreased dramatically from nearly 600 issuers in 2013 to 136 in 2023, according to the province’s securities regulator Alberta Securities Commission.

The thinning of Canada’s oil and gas companies is expected to continue as international firms move to exit the country, said Chatwin. Chinese offshore oil company CNOOC [HKG:0883; SHA:600938], for example, has stopped investing in its large Canadian asset, he added.

CNOOC in 2013 acquired Calgary-based Nexen, including its 72,000 barrels-of-bitumen-a-day Long Lake Facility, for USD 15.1bn. Last spring, news reports said CNOOC was preparing to exit its operations in Canada, the US, and the UK because of concerns that the assets could become subject to Western sanctions.

Several international companies have sold or reduced stakes in their Canadian operations. Oklahoma-based Devon Energy [NYSE:DVN] in 2019 sold its Canadian business to Canadian Natural Resources [TSX:CNQ] for CAD 3.8bn. Two years later, Japan Petroleum Exploration sold its stake in a shale gas project in western Canada. Last year, BP [LSE:BP] sold out of Canada’s oilsands and in September Repsol [BME:REP] sold its oil and gas assets in the country to Peyto Exploration & Development [TSX:PEY] for USD 468m.

Dealmaking in Canada will also be constrained by private equity’s inability to raise debt to fund M&A deals amid a higher interest rate environment, said Ashley White, partner and co-head of the energy practice at Bennett Jones.

There have been 12 completed PE deals in Canada’s oil and gas industry year-to-date, compared with 31 in 2021, according to Mergermarket data.

Canada’s ambitious emissions-cap policies also make it challenging for PE firms to raise capital for oil and gas deals, White said.

The Canadian government is pushing the country’s oil and gas industry to reduce its emissions 31% below 2005 levels, or 42% below 2019 levels, to 110 million tons by 2030.

And yet, White said she expects to see some consolidation in Canada’s oil patch as small- and mid-sized companies continue to be targeted by major companies.

Indeed, it would be surprising to see no M&A activity in the oil and gas sector with several companies going into 2024 zero-debt following years of fiscal discipline following previous boom and busts and the recent rise in crude prices, Chatwin said.

With ample cash to spend, Canadian oil and gas companies have been returning money to investors. About 40% of listed firms have intentions to buy back their own shares from the markets, compared to 21% in 2013, according to the Toronto Stock Exchange.