Canadian M&A activity sets record in 1997

Value of Canadian M&A Transactions [61,688 bytes]

Canadian oil and gas industry mergers and acquisitions (M&A) in 1997 reached a record $16.3 billion (Canadian), 60% higher than the previous record of $10.2 billion set in 1996.

Reserve acquisition prices were also at an all-time high with an annual median acquisition price of $6.59/ boe-a 6% jump from $6.22/boe in 1996 and 30% greater than the median price of $5.50/boe recorded in 1995, according to Sayer Securities Ltd., Calgary.

Canadian M&A trends

There were 44 corporate acquisitions of more than $5 million each in Canada's oil and gas sector last year, representing nearly 60% of the year's total M&A value.

The largest acquisitions were the $1.7 billion purchase of Wascana Energy Inc. by Canadian Occidental Petroleum Ltd.; the $1.3 billion acquisition of Chauvco Resources Ltd. by U.S.-based Pioneer Natural Resources Co.; and the $692.4 million acquisition of Morrison Petroleums Ltd. by Northstar Energy Corp.

However, these transactions were already topped in 1998 with the January announcement that U.S. company Union Pacific Resources Group Inc. will pay $3.7 billion to acquire Norcen Energy Resources Ltd.

Sayer pointed out that corporate acquisitions were generally higher-priced than property acquisitions during 1997. Company transactions were completed at a median acquisition cost 35% above that paid for acquisitions of property. Although corporate deals made up most of the annual M&A value, acquisitions of Canadian oil and gas properties made up 80% of the number of deals (166 of the 210 transactions that were worth at least $5 million).

While interest in purchasing natural gas assets increased in the fourth quarter, more than 60% of the total 1997 M&A value consisted of acquiring oil reserves. More than 15% of those acquisitions had a significant proportion of heavy oil assets, Sayer added.

1998 outlook

Historically, oil and gas prices and levels of financing in the petroleum sector are major factors affecting M&A activity levels and prices, Sayer noted. Both these leading indicators have dropped off considerably.

U.S. crude oil futures prices have fallen over 30% after reaching a high of $25.92 (U.S.)/bbl in December 1996, and the natural gas contract price is off almost 40% compared to its October 1997 high of $3.55 (U.S.)/MMBTU, Sayer noted.

The outlook for 1998 financing is also bleak with the Toronto Stock Exchange Oil and Gas Producers Index down by over 1,500 points, or 22%, since reaching its high of 7,158 in September 1997. In 1997, equity, debt, and other issues raised $7.85 billion for Canada's upstream oil and gas industry, a decrease of 18% compared with 1996.

In fourth quarter 1997, these factors began to exert downward pressure on acquisition prices, but high activity levels are likely to be sustained for at least the first half of 1998, Sayer predicts. The purchase of Norcen will ensure an above-average value for the first quarter of 1998.

Furthermore, companies that are well-financed or have access to low-cost funds-generally the industry's larger players-are gearing up for property and corporate acquisitions. Public companies with disappointing results in 1997 or in the first quarter of 1998 will be likely M&A candidates.

Royalty trusts are also among those seeking to benefit from falling M&A prices, and some of these organizations have said they intend to mount large 1998 acquisition programs. Royalty trusts as a group purchased $1.5 billion in oil and gas assets at a cost about 10% lower than property acquisitions by non-royalty trust companies.