The value of merger and acquisition activity in the Canadian oil and gas industry has soared this year to the highest level in 10 years, but with the decline in commodity prices, the pace has slowed significantly in the second half, said Calgary-based Sayer Securities Ltd., which has been tracking M&A activity in Canada since 1987.

In its latest report, Sayer said for the first half of 2001 M&A activity soared to C$21 billion. Higher gas and oil prices contributed to the increase, as did increased buying by American-based companies and escalating activity by royalty income trusts (RITS). “Activity was kick-started by the larger size of transactions in 2001 compared to previous years,” Sayer’s first half report stated. “The average size of deal this year was C$233.7 million versus C$123.4 million for the first half of 2000, and a mere C$29.7 million in 1999.”

According to the report, 45% of the total value of mergers and acquisitions came from three transactions for exploration and production companies: Calpine’s purchase of Encal Energy for C$1.4 billion, Anadarko Petroleum’s purchase of Berkley Petroleum for C$1.2 billion, and the single largest transaction ever recorded by Sayer, Conoco’s purchased of Gulf Canada Resources for C$6.9 billion.

All three major purchases of Canadian independents were made by U.S. corporations. In fact, American companies accounted for 54% of the total Canadian M&A market (C$11.4 billion). Of this amount, C$7.2 billion was for purchases of entire corporations.

“As opposed to asset transactions, corporate deals have the benefit of adding an instant operating presence, usually including staff, undeveloped land and interrelated exploration and production functions,” Sayer’s report said. “One example of a U.S. company achieving this result was Anadarko’s purchase of Berkley, which was completed in March.”

Royalty trusts accounted for C$5.3 billion in merger and acquisition activity in the first half. The two largest deals by RITS were mergers, Canadian Oil Sands Trust’s transaction with Athabasca Oil Sands Trust for C$1.97 billion and the combination of Enerplus Resources Fund with EnerMark Income Fund for approximately the same amount. In addition to these transactions, RITS acquired another C$1.8 billion in assets and companies through 14 purchases exceeding C$5 million each.

One of the major factors contributing to this trend in activity was a 64% increase in acquisition prices to the “highest first half median recorded in the last 10 years,” according to Sayer. The median acquisition price for 2001 rose to C$10.53 per barrel of oil equivalent (gas converted to oil on a 10:1 basis) from C$6.44/ boe in the first half of 2000. Higher gas prices were the main cause. The median price for gas jumped 91% over prices in the first half of 2000, whereas oil only increased by 34%.

After spot gas prices peaked at US$9.78/MMBtu on the New York Mercantile Exchange in December 2000, however, there was a sharp decline in prices to US$3.12/MMBtu at the end of June. That “sent a shock wave through the M&A market,” Sayer said. “The price drop created a disparity between what buyers are willing to pay, based on current low gas prices, and the higher value sellers are still hoping to attain, based on last winter’s gas prices.” This has led to a steep decline in M&A activity this summer.

“The pause will allow the oil industry to take a much-needed hiatus to recover from the frenetic M&A pace in the first half of 2001,” said Sayer. “The deals that are being done now may also allow for some stabilization in pricing to become evident.”

©Copyright 2001 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.