Canadian M&A deals now based on two different pricing markets

By OGJ editors

HOUSTON, Oct. 1 -- Canadian oil and gas merger and acquisition prices are not moving in step with current spot prices, a recent study conducted by Sayer Securities Ltd. found. Based on the Calgary-headquartered firm's analysis of 532 transactions valued at greater than $5 million (Can.) that transpired during Jan. 1, 1995 through June 30, 2002, it said that M&A prices may in fact be based on two different pricing markets.

The data, Sayer noted, "proved up some 'truisms' in the business," adding, "One of the obvious truisms supported by the data was that as monthly oil and gas commodity prices went up, or down, so did M&A prices," Sayer said.

Sayer looked mainly at M&A prices paid for both reserves in the ground and for daily production, and it based its analysis on spot contract prices for oil and gas on the New York Mercantile Exchange and on AECO-C and Edmonton prices for Canadian gas and oil, respectively.

Sayer found that, "M&A values measured on the purchase price of reserves, for acquisitions in which gas made up over 50% of the asset, correlated 62% to movements in AECO-C spot gas prices and oil-weighted acquisitions correlated 59% to Edmonton reference prices."

"One of the emerging trends is that prices paid for gas acquisitions in the last few years are becoming much more directly related to current prices than they were in the past," Sayer noted. "The correlation between AECO-C spot prices and the price paid for production on gas-weighted transactions has nearly doubled over the 7½-year time period," Sayer said.

"Another interesting development from the statistical analysis is that commodity prices explain only 60-75% of the price movement in M&A transactions," Sayer noted, which leaves 25-40% of the price movement in M&A transactions "related to other factors, such as the level of industry cash flow, the supply and demand of properties, and general finding and development costs for reserves.

"However, the statistical analysis shows us that, with all other things being held equal, a gas-weighted property or company would receive the highest M&A price when spot prices are at their peak," Sayer concluded. "Thus, a gas-weighted company looking to put itself up for sale should do so in the winter, when gas prices are traditionally higher than in the summer."