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Canadian Assets are Hot Prospects With Price & Drilling Hikes

September 6, 1999
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Canadian Assets are Hot Prospects With Price & Drilling Hikes

As producers get organized for a forecast big push to accelerate development of Canadian natural-gas supplies, a hot market in field assets is emerging.

By mid-year, packages worth nearly C$5 billion (US$3.4 billion) were on the market, according to Sayer Securities Ltd., a Calgary investment house that has made a specialty of tracking Canadian asset, acquisition and merger transactions.

The total includes properties sold recently by BP Amoco Canada for C$1.6 billion (US$1.1 billion). Although the assets were all in oil production, the sale underlined the declared intentions of leading Canadian gas producers to grow bigger. BP Amoco Canada sold the oil properties in order to concentrate on gas and pay for the sharpened focus.

BP Amoco remains the top Canadian producer, with gross output of about 1 Bcf/d counting provincial royalty shares of 20-30%, depending on the characteristics of fields. But Canadian-owned producers, led by PanCanadian Petroleum and Alberta Energy, are nipping at the international giant's heels and vowing to overtake it soon.

The rising interest in gas is also illustrated by prices being paid for Canadian field assets, Sayer reports. Prices for gas acquisitions in first-half 1999 averaged a 16% premium over oil. Assets dominated by gas fetched C$6.67 (US$5.33) per barrel-of-oil equivalent, while packages that were primarily oil went for C$5.75 (US$3.95) per boe.

The asset trends confirmed indications in higher-profile takeovers that gas production dominates producer strategies in Canada. Burlington Resources of Houston scooped up Canada's ninth-biggest producer when it paid US$2.5 billion for Poco Petroleums Ltd., which is about 55% gas and 45% liquids, counting byproducts of its gas fields as well as oil. Talisman Energy pointed to extensive gas assets in the Peace Country of northeastern British Columbia and northwestern Alberta to explain itself when it paid C$1.2 billion (US$825 million) for Rigel Energy.

By the Sayer count, Canadian acquisitions and mergers in third-quarter 1999 already exceed C$5 billion (US$3.4 billion). Along with costs of corporate takeovers driven by oil and gas prices, the value of transactions in reserves is expected to increase. "The highest-priced deals are likely to be corporate acquisitions of companies that are weighted towards natural gas," Sayer predicts.

The consensus that glory days have arrived to stay for Canadian gas is also underlined by another prominent Calgary specialty house in energy finance, FirstEnergy Capital Corp. In the latest in a series of book-length status reports to investors, titled Canadian Energy Synopsis, FirstEnergy projects years of gas growth.

The conservative "base case" at FirstEnergy anticipates field activity next year will regain most of the ground it lost in 1998, when falling oil prices brought an abrupt end to the record pace that saw 16,500 wells drilled in western Canada in '97. For 2000, the FirstEnergy base case calls for 14,700 wells. But the number could be much bigger -potentially 17,500 wells - if expectations showing on commodity-futures markets come true, the Calgary investment house said.

FirstEnergy maintains that even though rising oil prices have put easier drilling and development targets in reach again, the principal driver of the Canadian industry is gas. In Canada at least, gas is trusted far more than oil. The gas market is "continental" with the United States and the pipeline grid is expanding for more traffic, while oil remains a global maze with more complications including OPEC.

FirstEnergy says its canvassing suggests there has been a 5-6% erosion of U.S. gas production capacity at the same time as American demand is holding firm and Canadian export capacity is expanding. The investment firm says it is reasonable to hope Canadian gas prices will hold firm in coming years at C$3-$3.25 (US$2-2.20) per Mcf - the first time they have regained that range since the onset of energy free trade and deregulation in the mid-1980s.

The financial analysts also predict a huge effort will have to be mounted in Canadian gas fields just to keep up with demand and eventually use all the new export pipeline capacity. On the basis of average drilling performances, FirstEnergy calculates it will take 40,577 successful western Canadian gas wells over the next six years to fill up the new Alliance Pipeline Project on top of expansions by the TransCanada and Foothills-Northern Border systems.

Exploration and production companies are already under heavy pressure to accelerate drilling, FirstEnergy maintains. The firm does not cover major Canadian gas producers such as BP Amoco, Mobil Canada, Chevron Canada, Unocal and Phillips because they belong entirely to multinational corporations and do not trade separately on stock exchanges. Other surveys show that as a group, the foreign-owned companies' gas production has been on the rise or soon will be due to exploration successes such as northern drilling by Chevron.

But among the publicly-traded Canadian firms it tracks, FirstEnergy says "we currently estimate that 1999 exit gas volumes available for delivery will go down by approximately 300 MMcf/d versus 1998 exit levels of 12.8-12.9 Bcf/d . . . there is no doubt that Canadian producers will have a hard time meeting contractual supply commitments."

The analysts, pointing to rising drilling-rig counts and fund-raising activity, say "currently Canadian producers are making an all-out effort to pursue natural gas but you haven't seen anything yet: The upcoming winter drilling season promises to be an all-time record high," with most and possibly all rigs capable of tackling medium-depth to deep gas targets fully booked since early August.

Gordon Jaremko, Calgary

©Copyright 1999 Intelligence Press, Inc. All rights reserved. The preceding news report may not be republished or redistributed in whole or in part without prior written consent of Intelligence Press, Inc.

ISSN © 2577-9877 | ISSN © 1532-1266
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