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Vol. 11, No. 27 Week of July 02, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Return to northern pastures

M&A activity, possible trust consolidation makes Canada fertile U.S. investor ground

Gary Park

For Petroleum News

Investment dealer Lehman Brothers has tipped its hand.

UBS Securities and Citigroup are laying their bets.

It’s all based partly or largely on the widely anticipated consolidation of Canada’s oil patch.

The pickings are plentiful, with nine large cap companies, 53 publicly traded and nine private juniors and 35 energy trusts, not to mention a vast array of service and support companies.

Feelings are strong that the bigger operations have the edge when it comes to contracting drilling rigs and obtaining the skilled labor that is in such short supply.

The prospect of a new wave of mergers and acquisitions has pulled Lehman back to Canada after an absence of five years, while UBS and Citigroup have expanded their Calgary offices, which include energy trading.

Lehman first to return

Lehman is the first of the large U.S. investment banks that reduced or shut down Canadian operations to return to the fold, although Goldman Sachs has made a modest return through a specialist lending group.

Lehman will set up shop in Toronto and Calgary, including a dozen bankers in Toronto to offer a full line of products, including debt, equity and M&A advice.

The dealer has also gone to the top shelf to head up its Canadian officers with Geoff Belsher, who was co-head of the Bank of Montreal’s U.S. investment operation, and was previously a leading M&A attorney.

For Lehman, the timing coincides with a feverish round of takeovers and financings, as the commodity price boom creates a market for resource-based foreign companies.

Paul Colborne, chairman and chief executive officer of TriStar Oil & Gas, is one of the leading forecasters of consolidation among trusts, which had daily output of almost 500,000 barrels of oil and 2.7 billion cubic feet of gas in the first quarter of 2006 and have accumulated a large land base which is often overlooked as they focus on production to ensure a steady cash flow to their unit holders.

He told the Canadian Society of Petroleum Geologists in June that the land holdings held by trusts would take a large company years to assemble, but, because trusts drill less than conventional E&P companies, the assets often revert back to the government.

However, Colborne sees a new trend emerging from trust mergers, when exploratory assets are spun off into what is known as a junior exploration company or a trust-exploreco which he believes is “here to stay.”

He said many of Canada’s trusts have their own explorecos and the vast majority have shown that the sum of their parts exceeds the valuation of the original company.

Will hostile takeovers become more common?

But the question being asked in the last few weeks, since the unsolicited offers by Petro-Canada for Canada Southern Petroleum and by Pearl Exploration and Production for SignalEnergy, is whether hostile takeovers will become more common.

Tom Pavic, an analyst with Sayer Security Advisors, said in a recent report that the abundant number of oil and gas companies for sale in the last few years probably deterred companies from taking the hostile route.

But now companies are reluctant to sell at current commodity prices and “potential purchasers see an opportunity to take advantage of this volatility believing that natural gas prices will rebound,” he wrote.

Pavic said the dearth of assets on the market this year could spark a return of the hostile bid, despite the Canadian industry’s long history of failures because white knights surfaced with superior offers.

Other analysts are not so sure the tradition of friendly deals will be supplanted because the industry still operates in what Jim Davidson, chief executive officer at FirstEnergy Capital, calls a “small community.”

He also suggested that many owners, who have gathered more wealth than they had ever imagined, might lower the prospects of hostile offers by deciding to take stress out of their lives and simply sell what they have built.

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PrimeWest leaves own backyard

Canada may be back on the radar screen for U.S. investment dealers, but the Lower 48 has its appeal for Canadian income trusts.

PrimeWest Energy Trust joined a lengthening list June 26 by rounding up a collection of oil properties in North Dakota, Montana and Wyoming for US$330 million, gaining production of 3,200 barrels of oil equivalent per day — 94 percent oil and 6 percent natural gas.

The sellers were not identified, although the assets were posted by privately held CamWest of Houston through divestitures firm Scotia Waterous.

The proven plus probable reserves of 28.9 million boe puts the price at about C$103,000 per flowing barrel — a steep premium alongside recent trust transactions that have peaked at about C$80,000 per barrel.

But PrimeWest Chief Executive Officer Don Garner said the trust has been forced to hunt outside Canada because of the dwindling prospects on the home front.

Other trusts such as Enerplus Resources Fund, Provident Energy Trust and Enterra Energy Trust have already extended their operations south of the 49th parallel.

The assets also include infill drilling and waterflood opportunities on 47,000 acres in the Williston basin, which is south of Saskatchewan’s Weyburn and Midale properties where enhanced recovery techniques involving carbon dioxide injections are under way.

The purchase stretched PrimeWest’s overall reserve life to 12.3 years from 11.2 years at current rates of production and boosts its average production to about 40,000 boe per day.

—Gary Park