Competing for deals

Canadian firms go after Western Canadian oil, gas assets as U.S. firms exit basin

Gary Park

Petroleum News Calgary Correspondent

This year could see the oil and gas yard sale to beat them all in Canada, as buyers and sellers jostle to take advantage of sky-high commodity prices before they weaken.

Four major transactions alone racked up more than C$2.4 billion in deals to the mid-point of 2004 and financial services firm Raymond James estimates the sell off could add another C$5.3 billion over the second half, not counting C$2 billion in assets being privately marketed.

The merger and acquisition market over the last 12 months has primarily been driven by U.S.-based companies opting to take advantage of a red-hot market and shift their activities to lower-cost, higher-growth prospects outside North America.

Among analysts, there is also a widely held view that the U.S. firms, who flooded into Western Canada from the mid-1990s to replenish their dwindling natural gas supplies at bargain-basement prices, have struggled to deliver results from the basin.

Some of the observers blame that failure to deliver material growth on a per share basis from the Western Canada Sedimentary basin on top-heavy bureaucracy in the U.S. firms and decisions by those companies to unload skilled employees who had a wealth of information about the basin.

Fundamental restructuring

Over the last year they have been joined by an exodus of major U.S.-based players — Marathon Oil, El Paso, Murphy Oil, Vintage Petroleum, Anadarko Petroleum and Calpine.

In the process they have opened the doors to every group remaining in the Canadian industry — large E&P companies, income trusts, junior producers and start-ups. The competition for assets has been intense, with Calgary-based energy consultant Sayer Securities noting in a recent report that traditional E&P players have shouldered aside the aggressive trusts this year.

Feasting on unprecedented cash flows and enjoying a surge in share values, the E&P firms bought companies and properties valued at C$2.8 billion in the first quarter, or 74 percent of the industry’s total transactions, Sayer said. In 2003, the E&Ps and trusts split the deals almost equally.

If that trend continues, observers suggest the E&Ps will chase the major targets, forcing the trusts to seek partners if they want to compete for big ticket items.

Not that the trusts have faded from the scene.

In the year’s richest deal to date, Enerplus Resources fund and Acclaim Energy Trust carved up the bulk of Chevron Canada’s Western Canada properties in a C$1.09 billion deal in late May.

Enerplus paid C$466 million and Acclaim C$434 million for Chevron assets, although the two quickly spun off C$189 million to Paramount Resources.

The next wave of sales involves EnCana, Anadarko, Vintage and Calpine.

In the past 12 months the major deals that have been concluded and those now entering the market are:

• August 2003: Marathon Oil sells its Canadian unit to Husky Energy for C$588 million. Of the 27,000 barrels of oil equivalent per day and 39.8 million boe of reserves, Husky unloaded 7,500 boe/d to EOG Resources for C$320 million.

• February 2004: El Paso does a C$346 million deal with BG Group, the British-based company born out of a merger of Centrica and British Gas. In returning to Canada after an absence of a decade, BG has gained a foothold with 132 billion cubic feet of reserves in Alberta and British Columbia producing 80 million cubic feet per day and, more importantly, 630,000 acres of undeveloped land.

• April 2004: Murphy Oil walks away from Western Canada’s conventional fields after a two-way deal. Pengrowth Energy Trust paid C$550 million for 46 million boe of heavy oil, light oil and gas properties, producing 15,500 boe/d, while Canadian Natural Resources acquired the balance, including 68 million cubic feet per day of gas output and 395,000 undeveloped acres, for C$280 million.

• May 2004: ChevronTexaco unveiled a C$1.09 billion, three-way transaction, with Enerplus Resources Fund paying C$466 million for 11,500 boe/d and Acclaim Energy Trust pumping C$433.7 million to gain 17,000 boe/d. The trusts immediately unloaded 140,000 net acres, 10,000 boe/d of production and 22.2 million boe of reserves for C$189 million to Paramount Resources. But ChevronTexaco’s Canadian unit will retain its big frontier assets — Mackenzie Delta, Athabasca oil sands and East Coast offshore.

• May 2004: ExxonMobil and Apache formed a joint-venture E&P in a US$385 million arrangement to produce 10,000 boe/d. In Western Canada, Apache will drill more than 250 wells on almost 300,000 acres of undeveloped properties, leaving ExxonMobil to collect a 37.5 percent royalty on the Canadian properties and a 35 percent interest in production.

• June 2004: Vintage Petroleum announces plans to sell its Canadian assets for a projected C$500 million. Proved reserves at year-end 2003 were 67 billion cubic feet of gas and 3.5 million barrels of oil, with total output last year of 3.94 billion cubic feet of gas and 235,000 barrels of oil.

• June 2004: Anadarko launches what could be the blockbuster sale of all in this wave, offering a possible US$1.45 billion in non-core Canadian holdings, putting 41,500 boe/d on the block as part of a US$2.5 billion asset offering.

• June 2004: Calpine looks for buyers for 230 billion cubic feet of Alberta natural gas reserves valued at about C$540 million and says it may also shed its 20 billion cubic feet of reserves in Calpine Natural Gas Trust.

On top of that, EnCana is marketing stakes in 12 non-core oil and gas fields over the balance of 2004, hoping for proceeds of US$1.4 billion. With combined output of 40,000 boe/d, the sale is being conducted in an open auction format.