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Canadian trusts face ‘brave new world’ NAL sets standard with 4 deals in recent months as it bulks up prior to joining corporate world once trusts lose tax-free shelters Gary Park For Petroleum News
NAL Oil & Gas Trust is rapidly becoming a leader among Canada’s trusts as it settles on a future strategy with barely one year left before losing its tax-free status.
It struck an agreement Oct. 13 to take over Breaker Energy for C$403 million (including the assumption of C$93 million in net debt) — its fourth deal in recent months.
Launched six years ago by former executives of Alberta Energy Co. (a founding company of EnCana), NAL is moving into the midrange of Canadian oil and gas producers.
Assuming the Breaker transaction is concluded in early December, NAL expects to enter 2010 with production of 31,000 barrels of oil equivalent per day from properties in Alberta, British Columbia and Saskatchewan.
It will have a proved-plus-probable reserve life index of 8.7 years from reserves of 96 million boe, undeveloped land of 550 acres and tax pools (or credits) of C$1.2 billion (including Breaker’s contribution of C$270 million).
Breaker will contribute production of 6,700 boe per day (45 percent oil and gas liquids and the rest natural gas), 23 million boe of proved-plus-probable reserves and 140,000 net undeveloped acres.
Deal follows earlier buys The deal follows NAL’s acquisitions of Alberta Clipper for C$115 million and Spearpoint Energy for C$16 million, plus a joint venture to exploit central Alberta’s Cardium oil play.
The trust will issue about 25 million trust units at C$12.54 each to finance the acquisition, which works out to C$5.96 a Breaker share, a 12 percent premium to the junior company’s preceding 20-day average trading price.
On a production basis, NAL is paying about C$58,000 per flowing barrel and C$16.91 per barrel for reserves, compared with ATB Financial’s estimated average of C$46,195 and C$12.93.
Kim Page, an analyst with Wellington West Capital Markets, said that given the valuation metrics there is unlikely to be a counterbid.
Breaker President Dan O’Neil said blending his company’s assets with NAL’s strong financial position “will allow the combined entity to high-grade its opportunities and fully develop and expand Breaker’s potential.”
Breaker has pinpointed about 400 (350 net) low-risk development prospects, including 190 horizontal resource-style locations on its land, with the prospect of adding 2,900 boe per day in central Alberta and long-term gas opportunities in northeastern British Columbia of 50-100 billion cubic feet of recoverable gas.
NAL Chief Executive Officer Andrew Wiswell said the inclusion of Breaker will be another significant step in repositioning to convert NAL from a trust to a corporation in 2011, when the Canadian government will put both sectors on the same tax footing.
He said NAL’s objective is to add “quality assets with upside opportunity through internal investment and acquisitions.”
Action on the M&A front has been quietly gathering speed this year as trusts have decided what route they will take in the post-2010 world.
No single solution The decision making comes three years after Canada’s Finance Minister Jim Flaherty dropped a bombshell on the sector to avert a stampede by corporations in all sectors to join trust ranks and take advantage of a tax loophole.
Now that the initial anger has faded, the bulk oil and gas trusts seem resigned to joining the corporate world, though some will delay their transition while they use tax pools to reduce their taxable income beyond Jan. 1, 2011.
Some apparently believe that it will make no difference if they continue as trusts and some have trimmed their monthly cash payouts in favor of increasing capital spending to strengthen their reserves and production.
The conclusion is that there is no single solution for trusts plotting their future direction. Sayer Energy Advisors has reported that trusts completed C$1.4 billion in unit issues in the first half of 2009, compared with a paltry C$218 million in the same period of 2008, raising the total from unit issues and debentures to C$2.1 billion.
Sayer said these moves could underscore M&A activity by trusts that want to expand their core operations before joining the corporate world in 2011.
In addition to NAL, the busiest acquisitors have been Penn West Energy Trust and Zargon Energy Trust.
More capital appreciation One thought taking hold is that the next generation of trusts will lean more toward capital appreciation from their transition income-generating priority, which could benefit the struggling service sector if it results in increased exploration and development, with an emphasis on horizontal wells and multifracturing work.
Meanwhile, Calgary-based investment dealer Peters & Co. has listed Pengrowth, Paramount Energy Trust and Peyto Energy Trust as relatively cheap takeover targets based on their expected 2010 cash flows per barrel of oil equivalent against their boe enterprise values.
“From an acquirer’s viewpoint, desirable entities possess above average cash-flow generating capabilities and below average current valuation levels,” the firm said.
Blackmont Capital said that comparing the “real-world valuation parameters” of the NAL-Breaker deal with current market valuations of some intermediate producers, “a couple of them appear to be overvalued.”
In particular, the firm identified Birchcliff Energy and Progress Energy Resources as “expensive on a flowing barrel basis,” while Celtic Exploration and Progress “look expensive on a reserve basis.”
However, Blackmont said it was “dangerous to draw conclusions based only on this one transaction” adding it would “not expect market valuations to vary too widely from what real-world purchasers are prepared to pay for assets.”
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