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Vol. 11, No. 15 Week of April 09, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Canada is no place for bargain hunters

Review says income trusts and oil sands have elevated Canadian asset values; aggressive state-owned firms are an emerging factor

Gary Park

For Petroleum News

Those who fancy an upstream slice of Canada’s hydrocarbon action need access to the money tree.

At a time when corporate and assets deals around the world are racing to unimagined heights, propelled by record commodity prices and the hunger of state-owned companies to corner reserves, Canada is leaving everyone else far behind.

The latest global upstream M&A review, prepared jointly by John S. Herold and Harrison Lovegrove, said strong values last year reflected access to a “liquid and large market, high commodity prices and elevated regional finding costs.”

North American M&A deals rose 30 percent last year to $48.4 billion (led by ConocoPhillips takeover of Burlington Resources for $36.4 billion).

The implied reserve value for the continent, including oil sands/bitumen and heavy oil transactions, was $14.62 per barrel of oil equivalent, compared with a global average of $9.60 that, itself, had soared from $3.16 in 2004.

In the first quarter of this year, the North American average has jumped again to $18.01.

Canada most expensive

But Canada left those numbers in the lurch, making itself the “most expensive region for both proved and proved-plus-probable reserves,” Herold Senior Vice President Christopher Sheehan told a conference call March 29.

Racking up corporate and asset deals worth $19.2 billion, 12 percent of worldwide transaction values, Canada recorded an average for proved reserves of just over $20 per boe, with 30 percent of deals exceeding $30 per boe, compared with a European average of slightly above $15 and a United States average of $12.50.

In Canada, the deal values for proved plus probable reserves were actually 20 percent higher than even the value of the U.S. proved reserves, Sheehan said. “So, it’s a very hot market in Canada.”

He said a number of factors are at play, including the competitive pressures placed on all players by the “very active” income trusts; “very elevated finding costs”; and a “very mature and very liquid market serving a very large consumer market.”

In the current commodity price environment, Canada remains attractive on a net back basis, but not as attractive as the U.S., Sheehan said.

The oil sands gained strong international attention last year, with transactions involving undeveloped proved, probable and possible reserves carrying “implied” values 40 percent above what producing proved reserves fetched only two years ago, the review said.

That was reflected in the C$1.35 billion France’s Total paid last year for Deer Creek Energy, which owns 84 percent of the Joslyn project, which is expected to produce 2 billion barrels of bitumen over 30 years from in-place reserves of 7.5 billion barrels.

Reflecting the staggering rise in the value of oil sands property, that same lease was scooped up by Deer Creek in 1998, which paid Talisman Energy a base price of C$26 million.

In 2002, Enerplus Resources Fund took a 16 percent working interest in Joslyn from Deer Creek for C$16 million, plus the assumption of contingent project debt of C$4.1 million.

Sheehan said that with some high-capital cost oil sands projects becoming “increasingly economic at today’s oil prices, it’s not surprising that we started to see that activity through M&A.”

He said emerging players, such as the state-owned Chinese firms, CNOOC and Sinopec, which made a “small splash last year are looking to add reserves and get access to the large resource volumes” in northern Alberta.

“When you take a look at deal values, they’ve just exploded across the board in Canada,” he said. “It’s staggering what folks are willing to pay to get into that play.”

Aggressive deal-making by state-owned firms

The entry of the two Chinese companies into small start-up ventures was a measure of the aggressive deal-making by state-owned firms in 2005 as they combined ample cash reserves with a determination to replace reserves.

The review said the shopping efforts by CNOOC, Norway’s Statoil and Brazil’s Petrobras help drive up deal values in some regions.

Harrison Lovegrove managing director Michael Bridden told the conference call that when assets packages are not available because companies obtaining good cash flows are reluctant to sell “companies tend to buy other companies.”

Although state-owned enterprises are often buyers in politically risky regions of the Middle East and South America, most reserve hunters are willing to dig deeper to buy assets in less risky countries, he said.

Over the past five years, state-owned buyers negotiated deals worth about $5 billion a year — a figure that doubled in 2005 and would have gone far higher had CNOOC pulled off its bid for Unocal, the review said.

It said the Chinese invested $6 billion last year, up from $1 billion in 2004, and have completed deals worth $2.5 billion in the first quarter of 2006.

“Typically these deals are in places international producers have either exited or found that the above-ground political risk was maybe a little difficult for them,” the study said.

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