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The bigger they are the better Long-anticipated consolidation takes off in Canadian energy trust world; race to grow results in four deals totaling C$5.7 billion in 10 days at the end of April; ’05 deals totaled C$15.6B Gary Park For Petroleum News
A trickle has quickly turned into a torrent as the Canadian energy trust sector undergoes its most dramatic reshaping since it first surfaced in the 1990s.
In the space of 10 days at the end of April, matchmakers pulled off four transactions worth a combined C$5.7 billion and involving about 215,000 barrels of oil equivalent per day.
It was exactly what observers have been pointing to, but the rash of deals caught most of them off guard.
Deals announced
Here’s what occurred, pending unit holder and regulatory approvals:
• Penn West Energy Trust absorbed the assets of Petrofund Energy Trust for C$3.1 billion, creating a super trust carrying an enterprise value of C$11 billion, producing 135,000 boe per day (balanced between oil and natural gas) from proved plus probable reserves of 515 million boe and having access to 4 million acres of undeveloped land.
• Daylight Energy Trust and Sequoia Energy Trust pulled off a C$785 million merger to pump 24,500 boe per day (65 percent natural gas) from proved plus probable reserves of 68.5 million boe and holding 56,000 net acres of “high-impact gas exploitation resource play.”
• Focus Energy Trust snatched one of the most highly-rated prizes, paying C$1.12 billion for the bulk of assets controlled by privately owned Profico Energy Management, boosting its production by almost 10,000 boe per day to 25,250 boe per day, but paying a staggering C$83,000 per flowing barrel of production, in line with what Penn West paid.
• Advantage Energy Income Fund swooped on Ketch Resources Trust, offering C$725 million to land 13,400 boe per day, raising its output to 30,500 boe per day (70 percent natural gas and the rest oil and gas liquids) and aggregating 122 million boe of proved plus probable reserves.
Analyst: has been need for consolidation William Lacey, an analyst with FirstEnergy Capital, told the Financial Post the flurry was “remarkable, but the need for consolidation has been obvious.”
Over recent years, the spotlight has been on a scramble by mid-sized companies to join the trust ranks in pursuit of sustainable production.
Now that those entities are faced with the challenge of achieving economies of scale, the industry has anticipated a wave of consolidation, which was slow coming — with only four deals in the past year — until the dam broke in mid-April.
The simple explanation is that the maturing Western Canada Sedimentary Basin has trimmed opportunities to grow through acquisition.
A tightening asset market is reflected in the fact that only 35,000 boe per day was on the block at the start of April — 21,000 boe per day listed by private Samson Canada and the rest by Profico — compared with more than 80,000 boe per day a year ago.
Those offerings are far short of the 200,000 boe per day analysts estimate trusts need to replace the annual decline in their reserves.
Rash of deal making last year Last year, the rash of deal making by trusts involved 46 purchases and one sale valued at C$15.6 billion and totaling 311,000 boe per day of Canadian production, compared with C$8.5 billion and 147,000 boe per day in 2004.
Analysts such as Bruce Macdonald with Canaccord Adams do not expect a repetition this year of divestitures on the scale of 2005 activities by large independents.
The outlook is compounded by the retreat of potential sellers during a period of uncertain gas prices.
Consolidation has many benefits other than just allowing trusts to keep their monthly cash distributions flowing.
Scotia Capital analyst Grant Hofer said in a note to clients that recent months have bolstered the view that larger trusts have “significant advantages” over their smaller-cap peers.
The inclusion by Standard & Poor’s of 30 trusts in the Toronto Stock Exchange benchmark index this year and the growth of trust listings on U.S. markets means the larger operations can benefit from lower capital borrowing costs, making them more competitive in a tight asset market.
Advantage Chief Executive Officer Kelly Drader said the fact that his trust has just listed on the New York Stock Exchange increases the pressure to grow, gaining market visibility and liquidity, and appeal to a broader range of investors.
Kim Hong, assistant vice president at Dominion Bond Rating Service, agreed with that sentiment, saying “size is increasingly more important in the trust industry, driven by competitive and cost pressures.”
She said size allows trusts to hire talented managers, build their drilling programs and gain access to the financial means to work on longer lead-time projects such as Penn West’s carbon dioxide sequestration project in Alberta.
They also have the backing to compete for and buy reserves that hit the market, she said.
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