If the recent condition of North American E&P stocks were a reflection of the economy, American consumers' beloved Alan Greenspan would be 10 feet under. Instead, it is E&P stocks that have sunk as low, including those of Canadian issuers, in a departure-a chasm, really-from tradition. Shares of many oils are languishing at a closed capital-markets door, while better-capitalized (but also-bewildered) upstream-asset-hungry wolves wait in the woods. All were in a holding pattern, at press time. Who will eat in the Canadian E&P mergers-and-acquisitions market and who will be eaten? "There's going to be a lot of mopping up of junior oil companies," says Ross Kobayashi, president of Calgary-based Kobayashi & Associates Ltd., an oil and gas acquisition and divestiture firm. In terms of dollars spent, U.S. companies will do the bulk of the consolidating of these smaller oil-and-gas-company prey. In number of transactions, it will be the juniors themselves, he says. "Houston companies are here, shopping hard. To add reserves at those kinds of prices is really a great opportunity." Brian Imrie, managing director of Credit Suisse First Boston's Toronto energy practice, also believes that consolidation is on the horizon. "Consolidation is logical and it will happen, but it will take place over a considerable amount of time." The combination of two juniors does not a big company make, so the results of continued consolidation will be months, maybe years, in the making. In the end, the Canadian-junior breed will remain far from endangered, Kobayashi says. Like small, private U.S. E&P companies, there are plenty of them. He doesn't expect as many new juniors to eventually take the places of the fallen, though. "The creation of new Canadian juniors is going to be very limited." Kobayashi is just as confounded by investor noninterest in E&P stocks as are his peers and his clients. "We've never enjoyed such strong cash flows and yet stock prices are down," he says. It's a T. Boone Pickens kind of sweet dream. One junior oil company announced a stock buyback with its surplus cash, and the stock went down. "The junior companies here seem to be damned if they do and damned if they don't." Imrie says many CEOs are ready, and able, to begin buying and merging but are uncomfortable, too, with the current E&P stock market. "The CEOs are saying they probably should get together [and merge their companies] but they're not sure of market reaction." Investors may drive the stock down further. Small Canadian oils are suffering too from some sins of their brethren, Kobayashi adds. "There has been a series of train wrecks." There were Merit Energy's accounting problems and Blue Range Resources' inflated reserve valuations. "It has tainted the good juniors," Kobayashi says. So, why haven't the Canadian E&P asset-acquisition olympics begun? Potential buyers continue to find capital with which to buy to be too expensive or not available. Others are hoarding cash in these still-uncertain commodity-price times. Many are in vulnerable positions themselves and don't dare dilute equity further. And some believe sellers' prices are too high. "If your stock is trading at three or four times cash flow, you don't want to issue more paper," says Wilfed A. Gobert, an E&P analyst with Peters & Co. Ltd. in Calgary. "The emphasis this year is going to be on 'M' instead of 'A'...Even the acquisitors have got low stock prices." The holding pattern will continue until stock prices improve. Gobert says, "A lot of the problem is that the currency of the potential buyer is also depressed." Many Canadian E&P stocks have fallen and can't seem to get up. At press time, Gulf Canada Resources Ltd. was trading at nearly its 1995 public-market opening price. Renaissance Energy Ltd., at an all-time low. Beau Canada Exploration Ltd., less than its 1996 public-market opening. PanCanadian Petroleum Ltd., slightly more than its 1995 opening. Yet, some other Canadian E&P stocks-Canadian Natural Resources Ltd., Alberta Energy Co. Ltd. and Bonavista Petroleum Ltd., for example-were performing fabulously, in contrast. Bonavista was trading at an all-time high. Alberta announced recently that it is on the hunt for good buys. Imrie believes boards and managers will eventually decide the current investor disinterest in oil stocks is a new norm. Then, the circling will end and the mergers and acquisitions will begin. "I believe that boards and managements are getting closer to saying, 'This is a new world.'" The situation is clear to Frank Sayer, president of Calgary-based Sayer Securities Ltd. "If oil prices stay up there, there's going to be a lot of deals." Meanwhile, buyers and sellers aren't on the same commodity-price projection page. "There is no commonality of vision." Another impetus will be improved stock valuations, he agrees. "If share prices increase to reflect higher earnings and cash flow from production, public companies that are purchasers will be more willing to offer their shares as 'currency' in acquisitions. They will also have more access to financings from public capital markets, thereby helping to pay for the deals." He concludes, "There should be lots of choices of assets and companies to acquire in the coming year. The amount of assets on the selling block is the highest in years, as large companies rationalize their holdings. There is also an unusually high number of companies, mostly smaller in size, that wish to gain the benefit for their shareholders of the high M&A prices." M&A activity in the Canadian E&P sector fell 55% in 1999 from $24.9 billion in transactions in 1998. Sayer, whose firm tracks transactions, said the slower 1999 deal pace wasn't an anomaly; the huge sum of deals in 1998 was. "1999 wasn't a bad year, in terms of volume."