By the OGJ Online Staff
HOUSTON, Feb. 18 -- Treasury financings completed by Canadian oil and natural gas exploration and production companies in 2001 rose by more than $4 billion (Can.) to $7.9 billion vs. those completed in 2000, reported research firm Sayer Securities Inc., Calgary.
"Within each category of financings (debt, equity, and royalty income trust units), there were major changes in how the industry accessed new money; [these changes resulted] from three main trends in the last year -- the continuing decline of prime interest rates, the high price of oil and gas early in 2001, and the unprecedented level of activity in the merger and acquisition market," Sayer said.
Two trends from last year?the rise of Canadian natural gas prices and the fevered pace of M&A activity?hit record levels in 2001, according to Sayer.
"The price of natural gas reached its highest weighted average, monthly cash price in January, with AECO-C Hub topping out at $11.14/MMbtu," Sayer said. In addition, M&A transactions in 2001 hit $39 billion, an increase of 55% over the previous high of $25.1 billion set in 1998.
The prime rate, meanwhile, fell to its lowest point in the past 10 years, reaching a trough of 4.00% in November. "For most of the 1995 to early 2001 period, the rate was?6-7%, coming down from a high of 14.75% in early 1990," Sayer noted.
Debt financings showed the largest year-on-year increase during 2001, rising 170% to $5.4 billion vs. the year prior, "easily surpassing the previous record high in 1998 of $3.7 billion," said Sayer.
"The drop in interest rates caused more companies to use long-term debt, as their costs are substantially lowered, and it also provided the opportunity to 'fix' their interest rates, rather than relying on uncertain floating rates," the firm noted.
The three largest debt financings were completed by: PanCanadian Petroleum Ltd., $796.1 million; Alberta Energy Co. Ltd., $788.9 million; and Anderson Exploration Ltd., $622.9 million.
"The 2001 financings by PanCanadian and AEC have the distinction of being the first and second largest debt financings, respectively, in the last 10 years," Sayer said.
AEC received an interest rate of 7.40% on the 2001 issue, according to Sayer. In comparison, in September 2000 "AEC completed another debt deal with a 30-year term for $444.2 million at a rate of 8.17%," the firm noted, adding, "The 0.77% difference in the rate of these two transactions results in an annual savings of $6.1 million on the current debt issue, or $182 million in total lower cost over the life of the bond."
"As has been the trend over the last couple of years, the value of our 'other' category? made up largely of royalty income trusts (RITS)?increased again in 2001," Sayer said. That value, which rose 72% in 2001 vs. 2000, is the biggest total in the last 5 years, the firm said.
"With low interest rates, RITS investors look for a high yield in comparison to bonds or treasury bills. Despite lower oil and gas prices at year end, the average distribution on conventional oil industry RITS has been estimated for 2002 to be more than double the average yield on 'A' rated corporate bonds of 7%," Sayer said.
The value of the 'equity' category, Sayer noted, fell in 2001 compared with 2000, continuing "the downward trend, which has been evident over the last several years in the amount of 'risk money' being put into Canadian exploration and production company common shares," Sayer said.
This downward trend is being driven by oil and gas prices and by M&A activity, Sayer noted.
Sayer said that strong prices for oil and gas for the first half of 2001meant that "the larger E&P companies had sufficient money from cash flow to fund their activities. Therefore, they did not need to issue new equity.
"Secondly, many of the larger Canadian E&P companies that issued common shares in prior years disappeared due to takeovers by US companies, such as Berkley Petroleum Corp., Genesis Exploration Ltd., and Gulf Canada Resources Ltd," the firm said.
"The new US owners look to the American equity markets, not the Canadian scene, in order to raise the funds they need," Sayer said.
