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Providing coverage of Alaska and northern Canada's oil and gas industry
July 2006

Vol. 11, No. 31 Week of July 30, 2006

Two more trusts head for the altar

Gary Park

For Petroleum News

Consolidation in the Canadian income trust sector took another large stride July 24 when Pengrowth Energy Trust reached an agreement to buy Esprit Energy Trust for C$1.09 billion, boosting its own production by almost one-third to 74,600 barrels of oil equivalent per day.

In the process it also raised natural gas to 52 percent of its total output from 45 percent, taking advantage of what analysts view as an opportune time to bulk up on gas assets.

The deal, scheduled for completion by late September, also gives Pengrowth 291.1 million barrels of oil equivalent in proved plus probable reserves (229.1 million barrels of which are proved), 250,000 net acres of undeveloped land and a reserve life index of 10.6 years.

The purchase costs translate into C$72,450 per flowing barrel, a discounted rate when measured against some recent transactions, and C$18.50 per boe for reserves, up 17 percent from last year’s average acquisition price.

The transaction brings to an end a three-month lull on the deal-making front after a flurry of five mergers valued at C$6.5 billion and accounting for a combined 213,000 boe per day.

Will consolidations continue?

Whether the trend to grow trusts is headed for a slowdown is a matter of debate.

Esprit Chief Executive Officer Paul Myers believes consolidation will continue, given that the smaller operations are having difficulty meeting production targets let alone expanding their operations, but Sandy McIntyre, an analyst at Sentry Select Capital, expects an easing off now that junior E&P companies are cheaper to buy than trusts.

Pengrowth Chairman Jim Kinnear said the combination with Esprit is an “outstanding strategic fit,” giving his trust a chance to incorporate “long-life natural gas assets in the current price environment.”

In particular he welcomes the chance to add shallow gas and coalbed methane acreage in central and southern Alberta to Pengrowth’s core area of expertise.

The incentive for trusts to enter the major leagues is driven by several factors, including the leverage they gain in contracting with service companies as they divert more of their cash flow into exploration, and the stronger welcome they receive from financial markets, especially for those that obtain listings in the United States.






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