Under pressure from their banks to sell reserves and pay down debt, especially those carrying an oversized load of natural gas, Canada’s junior E&P sector is engaged in a lively repositioning.
For the past year, analysts have been issuing warnings that smaller companies now need C$100 million-C$200 million in capital, compared with C$20 million-C$50 million a few years ago, to launch operations and enter the technology driven sector where horizontal wells can cost up to C$20 million.
On top of that, there is a view that companies must drill at least 10 wells a year to be economic. Otherwise they have little choice but to grow through acquisition or sell out.
Andrew Potter, managing director of institutional equity research at CIBC World Markets, wrote recently that the Canadian oil patch has slipped into an unusual position of record-low equity valuations amid a record-low cost of capital that makes it vulnerable to takeovers.
“Should valuations remain depressed for any meaningful length of time, with cost of debt simultaneously remaining at such low levels, it would likely create a strong backdrop against which to finally see a broader-scale M&A scene emerge,” he said.
More deal making
The pointer to greater deal making in Canada this year — which some think could extend to natural gas heavyweights Encana, Talisman Energy and Nexen — has started to yield results among the juniors, with a flurry of transactions in the last month.
Whitecap Resources and Midway Energy, two oil-weighted producers on similar growth paths in Western Canada, are combining forces in a C$550 million cash, share and debt acquisition by Whitecap.
They said the deal will create an entity with current production of 15,000 barrels of oil equivalent per day (65 percent oil and 3 percent natural gas liquids and 32 percent natural gas) from resource plays in western Alberta and southwestern Saskatchewan.
Whitecap said in a release it will gain “high-quality, high-netback light oil assets … with significant growth and upside potential” in Alberta’s Cardium resource formation, matching its existing horizontal drilling operations in the play, while adding 5,400 boe per day of production to its portfolio.
Whitecap will also acquire Midway’s exploration interests in the emerging Beaverhill Lake light oil play in the Swan Hills area of Alberta.
Whitecap has grown from 275 boe per day of production in September 2009 through six acquisitions of companies and assets that lend themselves to the company’s use of horizontal drilling and waterflood techniques to develop Western Canada’s resource oil deposits.
Don Rawson, an analyst with AltaCorp Capital, said the market is “receptive” to Whitecap’s leadership, notably 27-year industry veteran Grant Fagerheim, who is president and chief executive officer.
“If management is liked and respected and the market believes they can execute properly, then the market will be there to fund them,” he said.
Fagerheim said he is confident Whitecap now has the energy base to reach 30,000 boe per day.
Producer up for sale
Bowood Energy, a Calgary-based oil and gas producer, announced it is up for sale by initiating a review of strategic alternatives, joining Anderson Energy which was put on the block in late February and Birchcliff Energy which called off its five-month search for a buyer in the same time period.
Bowood has 109,000 net acres in the untested Alberta portion of the Bakken formation that has been dominating light oil production in Saskatchewan, North Dakota and Montana.
U.S-based Murphy Oil and Bowood agreed 18 months ago to pay C$50 million as a one-time bonus payment for two five-year licenses on Blood Indian Tribe land in southern Alberta, with the tribe having rights to secure a 25 percent working interest in resulting wells and collecting double the Alberta government royalty rate on the first year of production.
The tribe brought in a partner last year to invest up to C$100 million to fund its portion of the joint ventures, but in January Bowood reported mixed results from the two wells.
Birchcliff estimated its February production at 21,400 boe per day, up 25 percent from a year earlier and the consulting firm of AJM Deloitte estimated the company’s proved plus probable reserves at 275 million boe, about 85 percent natural gas.
But analyst Gordon Currie of Salman Partners questioned Birchcliff’s estimated net present value of C$3.3 billion based on gas prices of C$3.50 per thousand cubic feet at the AECO trading hub in Alberta where current prices are struggling to get above C$2.
“We would argue that if you used the strip price for finding that value it would be a lot lower than what they’ve presented,” he wrote.
Anderson: not getting value in market
Anderson Chairman J.C. Anderson said in a statement his company is not getting value in the market “with natural gas prices in the can and capital hard to come by for juniors.”
With a market capitalization of C$104 million and proved plus probable reserves of 35.8 million boe, Anderson said its current share price of C$0.60 does not reflect the value of assets, which include central Alberta Cardium oil production and drilling inventory and C$495 million in tax pools.
Currie said Anderson will not have an easy time finding a buyer despite its presence in the Cardium formation, which has been rejuvenated with horizontal drilling and fracturing techniques.
Anderson produced 7,930 boe per day in the fourth quarter, with natural gas liquids accounting for 36 percent, up from 22 percent a year earlier and on track for 50 percent next year.
Second Wave Petroleum said it has received unsolicited proposals that have prompted it to explore strategic alternatives, including potential sale of its primary assets in the Beaverhill Lake and Judy Creek plays of Alberta.
The company reported an 87 percent increase in its proved and probable reserves over the past year to almost 11 million boe, mainly the result of light oil drilling at Beaverhill Lake.
Acumen Capital analyst David Doig suggested Pengrowth Energy and Crescent Point Energy would be likely contenders for Second Wave, which has a market value of about C$250 million and could fetch a premium of 50 percent to 70 percent.
