Alberta oil and gas juniors face a buyer's market, industry sources and bankers say25 June 2008

A substantially larger amount of oil and gas assets and companies are up for sale in Alberta this year due to high commodity prices, rising costs and difficulties accessing capital, industry sources said. Increased Alberta royalty charges, however, are keeping many buyers at bay.
"These guys always had an exit in mind and instead of waiting for a few more years when you don't know where prices will be, they are probably thinking now is the best time to sell," said a chief executive of a private junior oil and gas company. "There seems to be a general increase in activity in Alberta this year. Whether or not it's translating into deals, I don't know," he added.
"The market is a buyer's market right now," according to Bruce Edgelow, Vice President of Energy at ATB Financial, a lending firm in Calgary. "Today, generally you have companies putting stuff up for sale that are in positions where they need cash, or simply need to dispose of things that aren't core so they can put their time into things that are seeing growth."
Specifically, Edgelow said that based on his survey of the space, approximately 65% of juniors have less than 1,000 BOE/d of production, and many are struggling to access capital. "In today's market you need to get to 1,000 BOE/d to be viable. At that size you're generating about CAD 20m in cash flow to replace production. South of that, you're a sitting duck."
Oil and gas exploration companies with less than 1000 boe/d include Painted Pony Petroleum, Upper Lake Oil and Gas and Primary Petroleum. Some of those juniors, including Upper Lake Oil and Gas, have said they will look at merger opportunities.
Still, another industry banker said he does not believe that many companies or assets in Alberta will find buyers. "If you have assets in Saskatchewan, then you'd be acquired very quickly. But if you're in Alberta, you have a tremendous disadvantage due to the higher royalties and more competition. Also, Alberta is more of a gas basin than it is oil weighted," he explained.
The banker pointed to the proposed sale of Compton Petroleum, and said that he doubts Compton will see very many bidders for the company. "Sure they are a big company with good assets. But they are in Alberta and that means higher royalties. And let's not forget that they have debt," he explained.
Buyers may indeed be looking to minimize exposure to the Alberta royalties. This week Gentry Resources, a Calgary based junior oil and gas exploration company, sold to Crew Energy for CAD 238m (USD 234.7m), or CAD 47,600 per flowing boe/d. The majority of Gentry's current 4,500 boe/d of production, as well as its future growth potential, is on lands that allow Crew to maintain a royalty advantage in line with those in British Columbia.
Rising costs are also motivating companies to sell, a senior executive at another privately held junior said. "With higher rig rates and an increase in royalties in Alberta, it doesn't make sense to stay there." He added, "They are [unhappy] that royalty rates are increasing so they are taking their bat and ball and going somewhere else." The situation in Alberta is also affecting other provinces. Foreign investors assume that the increase is in all provinces, the executive added, and are thus reluctant to invest in oil and gas companies in Saskatchewan, British Columbia or the Maritimes.
Despite these perceptions, a US-based energy banker said he expects to see more M&A deals between US and Canadian energy companies. "I think there will be some deals done in Canada," he said. "The US and Canada are both coming back with natural gas prices moving higher and will be more attractive going forward."

by Divya Balji, Cheryl Thompson and Heather West

Back to Editorial