The Canadian oil patch is in the thick of a Darwinian cycle as junior E&P companies and energy trusts do battle for a shrinking supply of assets.
Caught up in a swirl of mergers, acquisitions and restructuring, the sector is turning over at an ever faster rate.
A survey of first quarter results by Iradesso Communications, a Calgary-based research and investor relations firm, showed 20 of the all-time record 83 publicly traded juniors had been created in a six-month period, while 19 others had either disappeared in mergers or switched to the trust sector.
The stable of 31 conventional energy trusts had grown by five in the same period.
Estimating the average lifespan of juniors at 30 months, Peter Knapp, Iradesso president, told Petroleum News that “everybody” was in a scramble to build, sell and start over again.
He said the motivation was a window of opportunity to take advantage of the commodity price cycle.
“Geologists, engineers and business people don’t want to miss their chance to make big dollars while the commodity cycle is in their favor,” he said.
Juniors average 16 percent increase
The survey, which defined juniors as companies producing 500 to 15,000 barrels of oil equivalent per day, said those firms posted average share value increases of 16 percent in the first quarter, compared with 8 percent by the trusts.
In total, the 83 juniors contributed 213,000 boe per day of Canadian production and the trusts were responsible for 750,000 boe per day. (The trust ranks have since expanded to 35 and the output to more than 900,000 boe per day).
Current combined volumes amount to about 25 percent of Canada’s total oil and gas production.
Iradesso also concluded that the median gas weighting of the juniors was 69 percent, compared with 53 percent for trusts. With that balanced portfolio, trusts should be able to prolong a steady, long-term cash flow to fuel their monthly distributions to investors.
On an enterprise value per flowing boe, the median for trusts was C$66,400 per boe per day, just fractionally ahead of the C$63,100 for juniors.
Juniors’ equity issues up
While the trusts have attracted most of the attention in recent years, junior start-ups, often with seasoned management teams at the helm, raised C$1.9 billion in 172 equity issues in the first four months of 2005, C$400 million more than for all of 2004.
Sayer Securities, which tracks M&As and the capital financing market, said the juniors paid a median C$47,000 per flowing barrel for assets.
But that standard is fast disappearing, confirming the comments of Martin Peters, chief executive officer of Enermarket Solutions, who said anyone hoping to base a deal on 2004 prices was “on the wrong page.”
Just how far off base is reflected in a couple of recent transactions when Capital Energy acquired Tiger Energy for C$76,000 per flowing boe and Freehold Royalty Trust easily topped that figure by paying C$93,000 per flowing boe for Canadian Natural Resources properties.
Despite efforts by companies such as investment banker Tristone Capital to rebundle assets into packages of C$15 million or less that are more easily absorbed by juniors, the market is beyond the reach of many.
StarPoint Energy Chief Executive Officer Paul Colborne thinks the inevitable outcome will be a wave of consolidation over the next three to five years as trusts find themselves buckling under higher cost structures, steeper asset declines, overleveraged balance sheets and inadequate price hedging programs.
Colborne said StarPoint has hedged half of its production until 2007 to protect against a three-way rise in inflation, interest rates and the Canadian dollar along with any drop in commodity prices.
He said that should allow StarPoint to distribute 21 cents per unit even if oil falls below US$30 per barrel.
Peters & Co., a Calgary-based investment dealer, believes that so long as crude remains above US$40, most trusts will be able to sustain their distributions.
