E&P companies fight back in Canadian M&A market

Gary Park

Petroleum News Calgary correspondent

After starting to lag behind income trusts in 2003, the traditional E&P sector made a comeback in the first quarter of 2004, according to Calgary-based Sayer Securities, which tracks the M&A market.

The firm said E&P companies spent C$2.8 billion on acquisitions in the January-to-March period, or about 74 percent of all M&A transactions, compared with 50 percent for all of last year.

Leading the trend shift were British Gas Group, which acquired El Paso Oil and Gas Canada for C$456 million and Thunder Energy’s C$147 million purchase of Impact Energy.

Sayer said the E&P companies are showing their muscle by competing strongly for assets and takeover targets with “upside” such as large probable reserves and undeveloped land with drilling potential.

Thunder reflected that approach by paying about C$70,000 per daily producing barrel of oil equivalent, compared with the median acquisition price of just under C$27,000 per boe in 2003.

To trim that ultimate acquisition price and boost production from the assets, Thunder will inject the needed capital to grow Impact’s large base of non-producing reserves, Sayer said.

For British Gas, the El Paso package included 630,000 net acres of undeveloped land that the buyer believes holds considerable exploration potential that will support its drilling plans for many years.

Another new wrinkle on the M&A front was demonstrated by Great Northern Exploration, which paid C$39,000 per boe for assets in the central Alberta area, with about 40 percent classified as proved non-producing or probable. But the deal was a strategic fit for Great Northern which increased its working interest in the area to 97 percent from 65 percent.

Bolstering the competitiveness of the E&P companies was the backing of capital markets, Sayer said, noting that for 2003 E&P equity financings of C$2.4 billion were up 118 percent from 2000, the best annual dollar figure for six years.

Sayer said the attractiveness of E&P equity in the stock market has enabled those companies, in some circumstances, to trade at high enough values to compete with income trusts on acquisitions.