Companies digging in on the Canadian front

Some U.S. invaders shed oil and gas assets, others plan for long haul

Gary Park

Petroleum News Calgary Correspondent

As fast as it happened, the American invasion of Canada’s oil patch has slowed and in some cases gone into reverse. But it’s far from a full-scale retreat.

Faced with shrinking exploration prospects in the Western Canada Sedimentary Basin, the second largest producing basin in North America, some of the U.S.-based companies that feasted on Canadian assets in the 1998-2002 period have now embarked on consolidations and divestitures of non-core holdings.

With commodity prices remaining relatively high and acquisition prices following suit, it would stand to reason that “more companies that made major purchases in the past will review their assets with the intention of selling,” said Frank Sayer, president of Calgary-based Sayer Securities.

To that end, he suggested merger and acquisition activity could pick up in the second half of 2003.

In the first half of 2003, Sayer logged deals worth a mere C$5 billion — less than one-fifth the value in the first half of 2001 and scarcely a blip alongside the C$140 billion racked up in the five years from 1997.

Of the transactions to the end of June this year, U.S. buyers accounted for a mere C$200 million, or 4 percent of the market, compared with C$16 billion, or 61 percent, in the first half of 2001 and C$3.9 billion or 24 percent in 2000.

The continued strength of oil and natural gas prices is complicating deal-making, as prospective sellers hold out for prices that match the current value of their reserves and buyers insist on something based on longer-term averages.

So far this year, the scales have tipped in favor of sellers, with Sayer estimating the median acquisition price for the first six months at C$8.94 per barrel of oil equivalent, up 18 percent from the C$7.60 recorded in the same period of 2002.

Leading the U.S. retreat so far this year is Marathon Oil, which unloaded its Western Canadian interests to Husky for about C$820 million, with Husky spinning off about C$448 million worth to EOG Resources.

In addition, National Fuel Gas is selling the southeast Saskatchewan assets of its Seneca Resources subsidiary; Vintage Petroleums has had production troubles in the Northwest Territories without giving any indication it wants to bail out; and Calpine sold its northern British Columbia holdings to Pengrowth Energy Trust.

Some companies selling, others in Canada “for the long haul”

But others, in the words of Devon Canada president and Chief Executive Officer John Richels, are in Canada “for the long haul,” viewing their holdings north of the 49th parallel as an important part of an integrated North American gas market. Other U.S. independents such as Burlington Resources, Apache and Wiser Oil are ramping up their activities, giving every sign that they intend to stay. The Canadian Association of Petroleum Producers has calculated that foreign-owned companies control just over 50 percent of the industry, partly reflecting their expanding role in the East Coast offshore and Alberta oil sands.

Canadian units of Burlington, Devon, Apache and Anadarko contribute 15 to 40 percent of the parent companies overall production — reflecting their efforts in recent years to lock up prized natural gas resources beyond their home base.

The M&A spree was so intense that the number of large Canadian-controlled companies tumbled to six from 47 in 1997, with U.S. companies involved in 21 acquisitions or mergers.