Canadian producers made C$2.8 billion worth of corporate and asset purchases in first-quarter 2004 or 74% of the total of all of 2003, reports Calgary-based investment-banking and M&A advisory firm Sayer Securities Ltd. And far fewer of the deals went to royalty income trusts (RITs), reports Brent R. Heinz, a financial analyst with the firm. RITs had been dominating the deal market but traditional producers are managing to grab the assets that RITs aren't as interested in-assets with upside, or large amounts of probable reserves and undeveloped land with drilling potential. The RITs, meanwhile, are more interested in producing assets. "Another reason the E&P companies have been able to compete is that they are now much better funded, with high levels of cash flow, and most have relatively low debt," Heinz adds. "In addition, should they need additional financing, they also currently have the support of the capital markets...." Thunder Energy Inc.'s C$147-million purchase of Impact Energy Inc. came with much undeveloped land and nonproducing proven and probable reserves, for example. "This enabled Thunder to pay a price of approximately C$70,000 per daily producing barrel of oil equivalent (BOE) versus the much lower 2003 median acquisition price for the overall market of C$26,965." Also, BG Group paid C$456 million for El Paso Oil and Gas Canada Inc. The winning bid gives it approximately 630,000 net acres of undeveloped land and a large inventory of identified prospects, Heinz adds. Meanwhile, Great Northern Exploration Ltd.'s purchase of assets in the Innisfail area of Alberta for C$23 million was at an average C$39,000 per daily BOE. "Approximately 40% of the assets were classified as proved nonproducing or probable, and the acquisition was strategic in that it increased Great Northern's working interest in the area from 65% to 97%." A key to improved bidding by traditional producers has been increased capital-market support, he says. "The total raised for 2003 E&P equity financings of C$2.4 billion was up 118% compared to the 2000 total of C$1.1 billion. This has been the highest annual dollar amount raised by Canadian E&Ps in six years." Compton Petroleum Corp. was able to pay approximately C$33,700 per daily BOE and 2.2 times corporate cash flow for Redwood Energy Ltd. "In comparison, based on its share price at the time, Compton was trading at approximately 5.3 times annualized first-quarter cash flow or over C$46,000 per daily production barrel." In the deal, Compton gained increased ownership in its focus area. Heinz concludes, "While it is apparent that the landscape of the M&A market is constantly evolving, E&P companies are here to stay and will continue to have a strong role in the M&A market." -A&D Watch
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