Canadian companies lead M&A activity in first half of 2002

Canadian energy companies led their US counterparts in mergers and acquisitions in that country during the first half of this year, with the second highest activity level in the last 5 years.

By OGJ editors

HOUSTON, Sept. 17 -- Canadian energy companies led their US counterparts in mergers and acquisitions in that country during the first half of this year, with the second highest activity level in the last 5 years, said Sayer Securities Ltd., Calgary, an investment firm specializing in M&A activity within the oil industry.

The enterprise value of Canadian oil industry M&A activity during the first 6 months of this year totaled $20.5 billion (Can.), down 22% from $26.2 billion during the comparable half of 2001. Total enterprise value is measured by total equity, plus long-term debt and other liabilities: It represents a change from Sayer Securities' previous approach of using equity value, officials said.

M&A values on the rise
Energy M&A values have been driven up over the last 3 years by large firms—including many US exploration and production companies—completing deals with values in excess of $1 billion. But only two such deals were completed in the first 6 months of 2002, both by Canadian companies, for a total of $18.2 billion. That compared with six huge deals during the first half of 2001, with half being completed by US buyers for a total enterprise value of $13.6 billion.

In January, PanCanadian Energy Corp. merged with Alberta Energy Co. Ltd. in the largest transaction ($15.9 billion) to date by Canadian oil and gas companies (OGJ Online, Jan. 28, 2002). It was followed in May by Canadian Natural Resources Ltd.'s purchase of Rio Alto Exploration Ltd. for $2.3 billion (OGJ Online, Aug. 12, 2002).

Of the total M&A value for the first half of 2002, US purchasers completed only $177.1 million, said Frank J.D. Sayer, founder and president of the firm.

RIT activity level
The activity level of royalty income trusts (RITs) also decreased in the first half of this year compared with the same period a year ago. There were 11 acquisitions completed by RITs for a total value of $351.21 million.

"This is a major drop when compared to the first half of last year, where RITs completed 13 purchases for a total value of $2.1 billion," said Sayer.

Mergers between RITs also were neither as large nor as plentiful as last year, he said. The only RITs to merge during the first half of 2002 were NCE Petrofund and NCE Energy Trust. That transaction was completed in April at a value under $1 billion.

The two RIT mergers that occurred in the first half of 2001 (Enerplus Resources Fund with EnerMark Income Fund, and Canadian Oil Sands Trust with Athabasca Oil Sands Trust) had aggregate values in excess of $3 billion.

Sayer also reported "a couple of unique reorganizations, wherein an E&P company reorganized into two entities; one a royalty income trust and the other an E&P company. Both Paramount Resources Ltd. and Storm Energy Inc. are currently reorganizing themselves in this fashion."

Transaction prices
Although activity levels have declined, prices have not fallen as dramatically. "The median price paid per bbl of oil equivalent for reserves in the first 6 months of this year is down only 2% from the first half 2001 (at) $7.60/boe in 2002, compared with $7.74/boe in 2001," said Sayer. "This decrease is not as significant as might have been expected in 2002, given the lower commodity prices and the stock market's volatility."

While a large number of companies have cash to spend, he said, there is not a great supply of assets and companies to pick from. Nonetheless, Sayer reported, "New startup companies were very active in the first 6 months of this year, completing $360 million in 12 transactions.

"Many of the companies that purchased in the M&A market last year did so with a high ratio of bank financing, based on forecasts of high gas prices in 2002," Sayer said. "Gas prices have not reached these levels, and (the) slowing economic growth in 2002, combined with dropping stock prices, has left some of these buyers in need of a cash fix."

Consequently, some companies may be forced to put up for resale the assets they purchased last year, in order to get a quick return. "We may see a significant return of these participants to the Canadian M&A market in the near future, but as sellers this time rather than buyers," said Sayers.

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