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COPYRIGHT 2005 Hart Publications, Inc.
Heavily funded Canadian juniors and royalty trusts continue to grab up E&P assets and companies, lately squeezing out traditional, larger E&P players.
There are four main buyer groups in western Canada: start-ups or juniors, royalty trusts, large traditional Canadian producers and U.S.-based producers.
"All of the four market groups have been active bidders and all have been successful in making acquisitions, with the exception of the big Canadian operators this year," says Adam Waterous, vice chairman and president of Calgary-based Scotia Waterous. The firm was recently formed by investment-banker Scotia Capital and international asset-broker Waterous & Co.
Small-cap operators have been especially successful. Devon Energy Corp.'s Canadian asset package was sold to several small-caps. The big three transactions of the first half of 2005--divestments by Devon, EnCana Corp. and Unocal--each went to buyers representing different market groups--except large-cap Canadian operators.
A year ago, western Canadian asset buyers and sellers proclaimed the marketplace hot, and reiterated that this spring. In August, it was even hotter. And, unrelenting.
"We're seeing continuing appreciation in valuation of assets in the western Canadian basin," says John Koyanagi, head of oil and gas asset divestiture advisory for CIBC World Markets in Calgary.
In one recent deal, Houston-based Pogo Producing Co. plans to buy Canadian-focused Northrock Resources Ltd. from Unocal Corp. for US$1.8 billion in cash. Proved reserves involved 644 billion cubic feet equivalent. The acquisition cost is approximately US$2.48 per thousand cubic feet equivalent, according to Pogo.
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The deal represents a significant change of events in Calgary. U.S.-based companies have been net sellers of Canadian assets during the past few years. The Pogo purchase represents the first major crossborder deal for Canadian assets by a U.S. company since the late 1990s, generally.
"Is it the beginning of a trend? We don't know yet," Koyanagi says. The Pogo deal could be an exception. The company has been shedding non-North American assets, such as in Thailand and Hungary, and rebuilding its North American profile, he notes.
Waterous sees the Pogo-Northrock deal as an especially important event in the Canadian asset marketplace. "It shows that the market is not entirely dominated by the royalty trusts, and it shows that there is still U.S. interest in the western Canadian basin," he says.
U.S. companies have been interested in acquiring Canadian assets these past few years, Waterous says. However, they have been outbidded. "Their interest is not new."
The Northrock deal was pricey for a trust, the second likely buyer. It would have been a larger deal size than any a royalty trust has taken on alone. To date, the largest trust purchase was a two-buyer deal--Enerplus and Acclaim's C$1.1-billion purchase of Canadian assets from Chevron. "On larger transactions, the royalty trusts tend to not be as competitive on an individual basis," Waterous says.
Connecticut-based energy research firm John S. Herold Inc. and U.K.-based asset-broker Harrison Lovegrove & Co. report, "We do not foresee a widespread return of crossborder takeovers by U.S. E&Ps into Canada on the immediate horizon, as both M&A and finding and development costs in Canada have reached extremely elevated levels."
The median implied reserve cost in Canada increased 70% to a record high at more than US$15 per barrel of oil equivalent in 2004, the firms report in their "2005 Global Upstream M&A Review."
"Transaction value more than doubled to over US$10 billion (in 2004) after a respite in 2002-03, despite no single transaction in 2004 over C$1 billion."
Royalty trusts
Another important event in the Calgary market is another crossborder deal--this one in the other direction. Royalty trust Enerplus Resources plans to buy Dallas-based, privately held Lyco Energy, which operates in North Dakota and Montana.
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Provident Energy Trust broke out of Canada in 2004 with its purchase of California-based BreitBurn Energy LLC, and Enterra Energy Trust did so earlier this year with its purchase of assets from Rockies-focused Rocky Mountain Gas Inc.
Canadian trusts' profits from Canadian assets are distributed to unit-holders pre-tax; the unitholder is responsible for income taxes. Meanwhile, profits from U.S. assets are taxed before distribution to unit-holders. So, a Canadian...
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