WINNIPEG/TORONTO (Reuters) - Depressed Canadian oil prices are forcing energy companies to use their shares as a currency to fund acquisitions, but investors have been hard to win over to the strategy.

Canadian oil producers face a dwindling amount of capital willing to invest in the sector, leaving many with a stark choice, said Eric Nuttal, senior portfolio manager at Ninepoint Partners, which owns shares in MEG Energy (MEG.TO), Baytex and Athabasca Oil (ATH.TO).

“Do you increase in scale and get your market cap above $1 billion to get on the radar screen? Or do you just throw in the towel?”

Many are scaling up. The result, Nuttall said, will likely be more deals into early 2019, and a shrinking number of small-cap Canadian oil producers in the long term.

The Canadian oil patch has made 29 deals so far in the second half, worth $9.5 billion, the busiest half-year period for deals since the first half of 2017, according to Cormark Securities data.

“When you get into a period of such volatility, I think any kind of M&A is very difficult because revenues are certainly challenged.”

Shareholders are mainly interested in companies that pay dividends or buy back shares, said Cormark analyst Amir Arif.

“It’s almost like you can’t win if you’re a Canadian energy company,” said Janan Paskaran, a partner at Torys LLP who provides M&A advice to energy companies. “It’s hard to invest within Canada, and it’s tough to get investor support when you expand outside.”

“People are saying, ‘let’s not spend any capital.’”

On Tuesday, Trinidad Drilling (TDG.TO) shareholders rejected a friendly stock deal to sell to Precision Drilling Corp (PD.TO), choosing instead the certainty of a cash offer from Ensign Energy Services (ESI.TO). [nL4N1Y24UP]

Swiss-based IPC’s shares have traded more in line with the industry since the steep sell-off last month when it announced its purchase of BlackPearl Resources (PXX.TO), and investors generally support the deal, said CEO Mike Nicholson.

“We’re now well positioned for the recovery over the next two to three years,” Nicholson said in an interview from Geneva. “Should we start to see (Canadian) pipelines and crude-by-rail improve, I think there’s a huge amount of upside now in our share price.”

Reporting by Rod Nickel in Winnipeg, Manitoba and John Tilak in Toronto; Editing by Phil Berlowitz

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