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M&A deals cooling off in Canada As predicted in forecasts, mergers and acquisitions goes quiet after red-hot, C$50 billion year, as junior buyers fade from scene;
off-stage deals more likely over short-term; oil sands company Synenco Energy and Compton Petroleum are leading test cases Gary Park For Petroleum News
In line with forecasts by Sayer Energy Advisors, a specialist in oil and gas mergers and acquisitions, the Canadian M&A market is taking a breather after hitting a record last year, when assets and companies valued at about C$50 billion changed hands.
Sayer President Alan Tambosso expects 2008 will see many deals occur away from the public spotlight as a large number of companies quietly peddle themselves in an effort to avoid spooking the market, with the emphasis on share exchanges.
He said the reasons include a slump in interest among junior companies as the industry continues adjusting to the changed tax rules for income trusts and the Alberta government’s royalty overhaul.
Tambosso said the limited supply of properties known to be on the market reflects shrinkage in the ranks of companies producing 5,000-35,000 barrels of oil equivalent per day — the size favored by equity markets.
But Gary Leach, executive director of the Small Explorers and Producers Association of Canada, expects a downsizing among junior companies producing less than 5,000 boe per day because of high debt levels and restricted access to capital, or those who are forced into receivership.
Tambosso is counting on more share-for-share deals and higher prices for oil-weighted transactions.
Sayer is forecasting the pace will quicken later this year as the marketplace refocuses on smaller companies, leading to more property deals than in 2007.
Two deals closely watched Two of the most closely watched deals are expected to involve oil sands company Synenco Energy and Compton Petroleum, almost the last of the once-thriving intermediate sector. Both are intriguing for different reasons.
The 10-year-old Synenco has been engaged in a “strategic review” to maximize shareholder value — effectively up for sale — for almost 10 months, long enough to indicate the process is not going well.
That view was bolstered in late February when Chief Executive Officer Todd Newton, who has been eager to move ahead with Synenco’s Northern Lights oil sands project and add more Canadian assets to the portfolio, announced his departure.
Mike Supple, Synenco’s co-founder, chairman and CEO, will occupy Newton’s vacant seat, describing the change as an “important transition” for the company.
Idar Eikrem quit as chief financial officer in November.
“We have become more focused and more intent on working toward upstream regulatory approval (of a 2006 application filed for Northern Lights) and with board-level oversight on our strategic review of options (in other words bringing the sale process to a conclusion),” Supple said.
Synenco has 60% of Northern Lights Synenco is the 60 percent operator of Northern Lights, which is designed to initially produce 114,500 barrels per day and have a 30-year operating life, and a Canadian subsidiary of state-owned Sinopec holds the remaining 40 percent, acquired for C$105 million in 2005 to take a foothold in a lease holding 1.67 billion barrels of bitumen in place.
But a Synenco spokesman said the Chinese have no part in the latest changes, which isn’t to say Sinopec may yet be the buyer.
Synenco made another splash in late 2005 when it sold C$317 million worth of shares at C$17.50 in a successful initial public offering, then watched the shares jump to C$25 in summer 2006, only to slide to C$15 as investors grew worried about soaring capital costs in the oil sands. That slide continued last year to C$5.60 before edging back up to the current range of C$7.
CIBC World Markets has pegged Synenco’s net asset value at C$21 a share, an indication that it holds scarce oil sands leases, although the brokerage said that “as an early cycle oil sands play, the stock also carries above-average risk.”
Compton agrees to strategic review Compton, after more than two months of fending off the demands of its major shareholder, has finally agreed to conduct a “strategic review” of its natural gas-weighted operations — a process widely expected to result in the company’s sale.
Centennial Energy Partners, a New York-based activist hedge fund that holds 20 percent of Compton, startled Compton in December by describing the company’s operating plan as “ill-conceived” and called for an auction.
Professing to be “puzzled” by the demand, Compton tried riding out the storm, laying out an aggressive growth plan in mid-February to boost gas output this year by as much as 38 percent to 202 million cubic feet per day and overall production by 19 percent to 37,000 boe per day.
The program included a capital budget of C$410 million and 350 gas wells, a 30 percent increase in cash flow to C$255 million and sales of non-core assets for an estimated C$250 million.
Compton’s most recent disclosure of reserves a year ago put its proved plus probable gas at 1.2 tcf and oil and gas liquids at 50.6 million barrels.
How quickly Centennial will see a result is an open question. Allan Stepa, an analyst with Dundee Securities, does not anticipate a speedy deal because of Compton’s operational and share price performance over the past two years and the absence of an obvious buyer, leaving Compton to struggle on under debts of C$1.2 billion.
However, Stephen Calderwood, with Raymond James, suggested EnCana fits “like a glove” with Compton’s southern Alberta land base, while Abu Dhabi National Energy’s Taqa North could be a contender.
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