While commodity prices are only up about 10% year-over-year, acquisition prices are up by one-third, a reality in the Canadian market that was puzzling to Steven I. Paget, an analyst with FirstEnergy Capital Corp. "On a quarterly basis, acquisition prices paid by Canadian E&P companies and trusts rose from C$16.36 per proved-plus-probable (2P) barrel of oil equivalent (BOE) in the first quarter of 2005 to C$21.91 per 2P BOE in the first quarter of 2006, a gain of 34%," Paget says. "Over the same time period, Edmonton Light Sweet prices rose by 12% and Bow River heavy oil prices rose 6%, and AECO spot natural gas prices rose by 8.8%." Companies are willing to pay so much more for assets than current commodity prices because of future prices: the Nymex 12-month strip for crude rose 26% from first-quarter 2005 to first-quarter 2006 and the 12-month strip for gas rose 23%. "It is the longer-term commodity prices and the confidence they inspire that have made E&P companies and trusts pay more for assets." Although acquisition prices are now routinely above C$20 per 2P BOE, a trend that Paget believes will prove to be long-term, he predicts 2007 cash flows will average more than C$35 per 2P BOE, giving companies the confidence to continue buying. Other trends in the Canadian A&D space are that most transactions are small, averaging less than C$250 million so far in the second quarter of 2006, while the average transaction since first-quarter 2005 was C$169 million, Paget says. On a BOE basis, the average transaction size in Canada is between 5 million BOE and 30 million. Since January 2005, 43 transactions were in this range, while 41 were below and only six were above, Paget says. Additionally, Canadian buyers seem to prefer gas-reserve purchases. Gas reserves were 60% of asset purchases during 2005 and first-quarter 2006, he says. All of this implies that now and in the future in the Canadian A&D marketplace, producers are going to have to "pay to play," he adds. FirstEnergy forecasts US$64-US$68 oil and US$8-US$9 gas through 2008, thus "little relief in sight for buyers that are hoping for a price break," he says. "Given the trend of rising costs and rising acquisition capital that we are seeing so far in the second quarter of 2006, prices look to be settling as more buyers get comfortable with a more than C$20-per-BOE number."
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