Calgary Herald, February 3: Oilpatch assets on sale
Low oil prices will drive producers to sell assets
Chris Varcoe, Calgary Herald, Wednesday February 3
Petroleum producers driven by desperation will turn toward mergers this
year as they run out of steam, says a leading Canadian energy banker.
Low oil prices have painted some companies into a corner this year,
Arthur Korpach of CIBC World Markets in Calgary told a Canadian
Energy Research Institute conference on Tuesday.
While the amount of merger and acquisition (M&A) activity will drop off
slightly this year, buyers will now have the upper hand in making such
deals, he predicted.
"We will see -- and I believe this will be the hallmark of 1999 -- the
forced sales of oil and gas assets and companies,'' said Korpach, CIBC
World Markets' managing director of global energy. "(This) will be the
year of the buyer."
With crude oil prices stuck below $17 US per barrel for the past 58
weeks, consolidation is sweeping through the sector as producers look
to cut costs.
Some companies, such as Remington Energy Ltd. and Hurricane
Hydrocarbons Ltd., have already put themselves on the market.
But relatively few companies have the ability to take over competitors
because of limited access to capital markets, increased bank debt and
restricted cash flow, several analysts told the Calgary conference.
Total equity offerings by the sector in Canada fell to $1.9 billion last year
from $8 billion in 1997, while oil and gas stocks are down almost 45 per
cent since August 1997, said Mike Tims, president of Peters & Co.
investment firm.
"There are a handful of companies in this town with available cash flow,''
added Chris Fong, Royal Bank vice-president of corporate banking.
There is also a significant backlog of assets on the sales block -- about
$1.5 billion in Canada and an estimated $6 billion in the U. S., Korpach
said.
But there is no guarantee a merger will pay off for investors.
A review of M&A activity found two American companies that bought
Canadian producers in 1997-98 saw their stock values plunge 75 per
cent. During the same period, Standard & Poor's oil and gas index fell
41 per cent.
Four Canadian companies making takeovers during the same period
watched their stock prices decrease 49 per cent, compared to a
41-per-cent drop in the Toronto Stock Exchange's oil and gas index.
"It certainly is a pause for reflection as to whether M&A has added
value,'' he said.
International mega-mergers, with the promise of billion-dollar savings,
have fared better.
Since British Petroleum's takeover of Amoco Corp. was announced last
August, BP's share prices has risen 6.3 per cent (to the end of January),
while the oil and gas index dropped almost 50 per cent.
U.S. producer Exxon Corp., which is merging with Mobil Corp., has
seen its share price dip 6.3 per cent since the blockbuster deal was
unveiled last December, while S&P's oil and gas index is off 12.5 per
cent during the same period.
Korpach noted hostile takeovers in Canada have a mixed track record
since 1995, but have become more successful as oil prices have
dropped.
From 1995 to 1997, only four of 11 hostile bids succeeded as strong
commodity prices put many white knights on the field.
Last year, all three hostile offers triumphed in the oilpatch.
"In 1999, we will continue to see the hostile bids,'' Korpach said. "We
will (also) see a lot of negotiated transactions because there are many
companies interested in selling themselves."
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