Energy trusts on brink of merger wave

Viking Energy Royalty Trust and Harvest Energy Trust gave weight to those who believe Canada’s income trust sector is entering a “go big, or go home” era.

Already carrying a fair degree of individual clout, the two intermediate-sized operations are ready to merge, creating the fourth largest conventional oil and gas producer in the sector with a market value of C$3.3 billion.

If the combination agreement is concluded next March, the new entity — carrying the Harvest name — will produce about 64,000 barrels of oil equivalent per day, trailing only Penn West Energy Trust at 103,000 boe, Enerplus Resources Fund at 88,000 boe and Canetic Resources Trust at 80,000 boe. Canetic itself stemmed from the September amalgamation of Acclaim Energy Trust and Starpoint Energy Trust in what was hailed as a megatrust.

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Paul Charron, Acclaim chief executive officer at the time of the StarPoint announcement, said size is critical as the red-hot sector seeks to acquire new mature oil and gas fields to ensure cash flow can be directed to unit holders far into the future.

“The reality is being a bigger entity will reduce the competition for larger transactions,” he said.

While C$300 million purchases could be made by “almost anyone given the strength of the capital markets,” C$1 billion transactions are beyond the reach of most, Charron said.

Trusts also need to bulk up to improve their chances of bidding for rigs, which is another shift of direction as the sector resorts to the drill bit to add reserves.

Despite the Viking-Harvest deal, not everyone anticipates an early flood of consolidation.

Jeff Martin, an analyst at Peters & Co., said mergers among the 30-plus trusts will happen as weaker trusts are exposed and that will need a slump in commodity prices.

Raymond James analyst Don Short is counting on a shakeout in a sector he thinks is over-saturated, resulting in two camps: smaller trusts with output close to 10,000 boe and larger trusts able to compete for assets in Canada and internationally.

Those left in the middle will be faced with paying premium prices for a shrinking number of properties.

Based on oil prices of US$60 per barrel, the trust group should be able to acquire about C$13 billion in assets next year and there is less than C$1 billion on the market right now, Short said.

—Gary Park