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The spin goes on Energy trust sector breaks new ground with merger of E&P firms in C$1B deal, plus spin off of two junior companies to explore high-risk plays Gary Park Petroleum News Calgary Correspondent
The Canadian oil patch is in full spin cycle.
It started in the 1990s as major E&P companies found that trying to replace diminishing reserves through the drill bit was a losing proposition. So they started spinning off conventional assets to a variety of buyers, with juniors among their leading purchasers.
The juniors soon found themselves on the same treadmill. So they spun off mature assets to royalty trusts, whose primary purpose was to take advantage of tax benefits by distributing cash flow to unit holders rather than exploration programs.
The trusts are now doing their own spinning, by engaging in mergers with conventional E&Ps, converting the bulk of assets into the trust while spinning some into E&P startups.
The latest twist came on April 26, when two of the hottest juniors — Progress Energy and Cequel Energy — combined to create a C$1.14 billion trust.
But each spun off about 1,000 barrels of oil equivalent per day, or 10 percent of their output, into fledgling junior explorers to pursue higher-risk plays. First merger of producers to form a trust It was the first time that two oil and gas producers had merged into a trust, with the newly formed Progress Energy Trust starting out with production of 20,000 boe per day, moving into the top 10 in the trust sector.
In a unique twist under the merger arrangement, the trust and the two E&P firms will not operate as fully independent companies, but the Progress and Cequel executives are confident they can avoid conflict of interest.
Cequel Chief Executive Officer Don Archibald said the trust model was the best option for two companies that had made growth more difficult in the maturing Western Canada Sedimentary Basin.
He said his own company has found it “increasingly difficult to sustain” growth after growing from 1,300 boe per day two years ago to 12,000 boe per day.
Archibald said Cequel decided it could generate greater value for its shareholders by separating mature assets from “our highly prospective growth assets.”
Progress Chief Executive Officer David Johnson conceded his executives are “neophytes” in the trust world, “but we are well up on the curve ... we’ve gone to school and studied this for quite a while.”
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