CANADIAN OILPATCH / DRILLING ACTIVITY
It's drilling time again
October 15, 1996
Oilpatch shifting attention from acquisitions to winter exploration and developement drilling in Canada. There is also a boom for junior's working overseas in locations such as Nigiera, Ecuador and the Middle East. Article appeared in Financial Post this morning.
After dominating the oil industry over the past few years, mergers and acquisitions are temporarily taking a back seat to exploration and production.
With record prices for oil, the acquisition bargains that once blanketed the oilpatch are gone -- at least for now. "Merger activity is going to slow down because prices have gone so high," said Peters & Co. analyst Wilf Gobert, also noting that winter is traditionally the high drilling season. "Relative to the heated activity in the last six months, M&As will slow down," said Peter Linder, analyst with CIBC Wood Gundy Inc. "Many of the downtrodden have already been acquired. Consequently it's becoming relatively more attractive to acquire oil and gas reserves via the drill bit."
The next heavy action in the oilpatch will be exploration, particularly as high-impact plays in southern Alberta and Saskatchewan wet investors' appetites. The number of wells drilled this year is expected to reach a record 12,000, up from the old record of 11,871 set in 1994.
In this hot exploration environment, cash is flowing in rapidly, as prices for oil hit more than US$5 above annual forecasts of between US$18 and US$19. "The industry never sits on cash flow," said Linder, who is predicting a drilling boom in 1997.
A case in point is Calgary-based oil giant Alberta Energy which CEO Gwyn Morgan has called a "growth company." It intends to spend $600 million on exploration and production in 1997, up from $450 million in 1996. In 1995, the company spent $237 million on exploration and production. Alberta Energy will more than double the number of wells it drills in 1997 to 600. For 1996, it projects 290 wells, up from its 1995 rate of 235. "It speaks of our optimism as an industry and as a company," said AEC spokesman Dick Wilson. "[High drilling] is the weather vane of that type of optimism."
The company has also been active in the merger and acquisition department, grabbing Conwest Exploration Co. Ltd. for $1.1 billion in January. Wilson notes the increase in oil and gas found will be met by increased pipeline capacity. The Express oil pipeline project is on target, and the Alliance natural gas pipeline is calling for potential shippers in its current open season.
Many firms are also increasing their involvement in international plays, with junior oil companies just as active as the majors. "There is a boom in juniors working overseas," said Linder. For example, Profco Resources Ltd. and Abacan Resource Corp. are both in Nigeria, while Gulfstream Resources Canada Ltd. is in the Middle East, and Pacalta Resources Ltd. has a hot play in Ecuador.
But high oil prices could also mean that the merger and acquisition activity continues and companies that haven't had a stellar run in the current bull market could find themselves targets. "There are a few out there that haven't performed well and could be ripe for the picking," Gobert said.
Frank Sayer of Sayer Securities Ltd., who tracks mergers and acquisitions, also feels the M&A game is not over. "You'll find companies that will spend too much capital and will run up their debt level, and others that will be unsuccessful in their exploration programs," he noted. That means that some companies will be especially vulnerable after the drilling binge is over, as one company strives to acquire the assets of another more debt-laden firm. In addition, broader political and economic events, including shifts in interest rates or oil and gas prices, will determine the extent of merger activity.
|
