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Scrambling for bargains Income trusts in flurry of deals, most recent total C$1.7 billion Gary Park Petroleum News Calgary Correspondent
It’s garage sale season on a grand scale in the Canadian oil patch, with energy income trusts forking over premium prices to beat off their rivals.
In just two weeks, four trusts negotiated five transactions — four of them in just three days — valued at a combined C$1.7 billion in the scramble to corner producing properties and extend their operating lives.
Industry executives and analysts believe more activity is in store as junior E&P companies cash in on high commodity prices and the high unit valuations of the trusts. Pengrowth acquires Murphy assets The deal-making saw:
Pengrowth Energy Trust, the most diversified of all the trusts, bought most of the Western Canadian conventional oil and gas assets of Murphy Oil on April 8, moving into the heavy oil sector in a substantial way.
The C$550 million deal gives Pengrowth 43.6 million barrels of proved heavy oil, light oil and natural gas reserves and production of 15,500 barrels of oil equivalent per day. The daily production breakdown consists of 46 million cubic feet of gas, 1,550 barrels of light/medium crude and natural gas liquids and 6,250 barrels of heavy oil.
Murphy said it actually entered into binding agreements to dispose of the bulk of its Western Canadian conventional holdings for total proceeds of C$829.5 million, but offered no breakdown.
Murphy announced last December that it was seeking buyers for the properties to generate proceeds to focus on “high-growth” frontier areas such as Malaysia.
For Pengrowth, the transaction will boost its output by 33 percent to 62,000 boe per day, increase its recoverable gas reserves to 40 percent from 37 percent and add 219,000 acres of undeveloped land to its portfolio.
Pengrowth President and Chief Executive Officer James Kinnear said the new asset package gives the trust “exposure to higher impact areas ... with significant development potential.”
He said Pengrowth is more comfortable entering the heavy oil sector now that high oil prices have increased the value of that commodity, but also hinted that the heavy assets could eventually be spun off. APF adds Great Northern APF Energy Trust locked up a deal on April 7 to acquire Great Northern Exploration for C$291 million, adding 5,600 boe per day to its Alberta production, which will rise 40 percent, increasing its proved reserves by 14.16 million boe to 44.26 million boe and gaining about 140,800 acres of undeveloped land.
In paying about C$5.05 per share for Great Northern, APF offered a 7 percent premium over the previous day’s trading price.
APF President Steve Clouthier said the trust did not mind paying C$50,000 per flowing barrel of production to gain “upside” from the reserves and years of new production.
“We would not do that but for the fact that there’s tremendous development potential,” he said.
Clouthier said one of the prizes is Great Northern’s land holding in the Horseshoe Canyon area northeast of Calgary, rated as one of the most enticing coalbed methane prospects, making APF the first trust to take a major stake in coalbed methane. Provident lands Olympia, Viracocha Provident Energy Trust made a dual deal on April 6, landing two junior companies for C$423.5 million — Olympia Energy for C$217.6 million and Viracocha Energy for C$205.9 million.
Provident Chief Executive Officer Tom Buchanan told analysts the transactions “add considerable strength and stability to Provident’s cash flow and depth to its underlying assets.”
In addition to 198,000 net acres of undeveloped land, engineering reports assign total proved reserves to the combined purchases of 20.3 million boe, giving Provident total proved reserves of 62.1 million boe and a reserve life index of five years.
The trust estimates the assets will raise its output by 10,300 boe per day to 34,000 boe per day — 45 percent gas, 33 percent light/medium oil and gas liquids and 22 percent heavy oil. Operating costs will be C$7.50-$8 per boe in 2004. Petrofund starts buying with Ultima The acquisition binge started March 29 when Petrofund Energy Trust negotiated a C$450 million takeover of Ultima Energy Trust, to pool a combined 143.5 million boe of proved plus probable reserves and increase its production to 37,133 boe per day, moving it into fifth place on the list of trusts.
Ultima President Brian Gieni predicted at the time that the Petrofund deal could be a “trend of the future” for trusts, given the intense competition for assets in Western Canada.
He said it is becoming “very tough to compete and grow” in a way that trust investors have demanded, noting that the Petrofund-Ultima deal offers long-term solutions in the form of better access to capital, a longer reserve life index, more sustainable cash distributions and better prospects of exploiting properties.
That confirmed the growing views of analysts that the 28 Canadian trusts could be entering a period of upheaval at a time of shrinking netbacks, rising operating costs and the adjustment to new tax rules covering foreign ownership over the next three years.
The rate of asset depletion is reflected in the loss of production per trust unit, with ARC dropping 7 percent over the past three years, Petrofund by 17 percent in 2003 and Shiningbank Energy Trust and Viking Energy Trust shrinking by 12 percent each last year. Returns predicted to slide Peters & Co., a Calgary-based investment dealer, warned in January that based on unit prices and its forecast commodity prices for 2004 of $27 per barrel for oil and C$4.50 per million British thermal units for gas, cash returns from trusts could slide to 11-12 percent this year.
Over the last five years, total returns have averaged about 40 percent, but BMO Nesbitt Burns analysts Gordon Tait and Les Stelmach expect cash distributions will “trend lower over the next few quarters.”
The tight asset market is also forcing more trusts to break with their historic pattern and start chasing assets through the drill bit, with trusts drilling about 1,000 wells in 2003 compared with 889 in 2002.
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