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Gold/Mining/Energy : Strictly: Drilling and oil-field services -- Ignore unavailable to you. Want to Upgrade?

To: Ditchdigger who wrote (58295)	1/12/2000 7:36:00 AM
From: Tomas	Respond to of 95453

Canada: Mergers, takeovers predicted for smaller players in oil patch Ignored by tech-happy investors, energy companies can't raise capital The Globe & Mail, Wednesday, January 12 STEVEN CHASE Alberta Bureau Calgary -- Analysts predict 2000 will see a rash of mergers and takeovers hit junior and intermediate Canadian oil companies that have run up against a wall of indifference from investors more keen on technology stocks. Out of fashion and left with few other choices to attract the equity capital needed to expand, junior and mid-sized firms can only watch from the sidelines as the stampede of money to dot-com companies continues. "[There's] a great sucking sound as much of the money is heading for 'techland.' . . . There's a new game in town which probably isn't going to go away for a while," says veteran energy analyst Bill Magee of Credifinance Securities Ltd. in Toronto. Energy companies in general, and smaller-cap firms in particular, have seen the bull market predicted for 1999 flash briefly and fade after a short runup that lost steam last September after seven months. The average oil and gas stock bull market since 1970 has seen the Toronto Stock Exchange's oil and gas index gain 137 per cent, only to fall back an average of 42 per cent in a subsequent bear market. But the subindex gained about 75 per cent last year only to lose substantial ground to finish the year with a gain of 48 per cent. The sudden slump hit despite what many oil and gas producers argue are ideal conditions for the energy industry in Canada: oil prices in the range of $25 (U.S.) a barrel -- $14.50 is considered break-even -- plus natural gas prices that have seesawed between very healthy and 15-year record highs. "The combined prices of crude oil and natural gas in Canada are now better than at any time in recent memory," said Canaccord Capital Corp. analyst Gordon Currie and colleagues in a recent memo to clients. "At the same time, the level of oil field activity is not so high that the cost of services has become inflated. For producers, this is an ideal world." But despite ideal conditions, energy company stocks in Canada have slumped to the low end of their historic ranges when valued as a multiple of annual cash flow. "Given the very good fundamentals, the senior [companies] should be at seven [times cash flow] and they are at five. The juniors are maybe at three and they should be, they could be, at five," Mr. Magee said. If the market is soft in general for energy companies, it's worse for smaller fry trying to attract investors who remember the 25-year oil price lows of 1998 and several high-profile flameouts among their ranks. Where investors were once open to investing in a company with as little as, say, $50-million (Canadian) in market capitalization, many now make it clear they won't touch anything under $500-million, says Tom Ebbern, analyst with Newcrest Capital Inc. in Calgary. "I think you are seeing small caps being a bit of a specialty play among specific money managers." The consequence of these sagging share prices, despite healthy cash flow, is that companies are substantially undervalued on the market, and any stock issued to raise expansion capital right now would mean giving away stakes in firms for deep discount prices. The result is that companies that want to grow or develop prospects quickly are constrained to spending what they take in as cash flow. More and more juniors are starting to realize the Catch-22 they are facing: To grow fast enough to gain an edge you need share capital, but to attract this without giving away the farm you need to grow bigger. In short, they need to hitch up with somebody else or risk growing too slowly and never reaching a point where their shareholders are adequately compensated for their investment. The list of companies leaping or preparing to leap into another firm's arms is starting to grow: Symmetry Resources Inc. hooked up with larger rival Berkley Petroleum Corp. Petrorep Resources Ltd. has hired a financial adviser to consider its options. Most recently, Pursuit Resources Corp. started its own walk down the aisle last week, effectively putting itself up for sale as well. (All four companies are based in Calgary.) Pursuit's chief executive officer Nolan Blades said the company didn't manage to differentiate itself from all the other junior companies looking for investor interest alongside much larger companies. "The market gets fed from the top down." Analysts expect Pursuit and its two peers are just the beginning of a substantial merger and takeover phase among the small and mid-capitalization crowd of energy stocks. "Darwinian theory will dictate there will be fewer of these companies around. The capital markets and entrepreneurs have created too many companies," said David Stenason, analyst with Scotia Capital Inc. in Montreal. "You are going to see a lot of consolidation in the first half of the year and it won't be companies buying each other for cash; it will be paper," he predicted. There are an armful of theories on why investors are shying away from oil and gas stocks and why junior and mid-sized companies are the pariahs of the lot: None of them are very heartening. The obvious ones include: warmer weather this winter for the third year in a row; concern that price-setting oil cartel producers may boost production this spring and bad memories of the nasty dip crude prices took less than two years ago. A string of high-profile corporate meltdowns among juniors and intermediate companies -- including Probe Exploration Ltd., Merit Energy Ltd. and Blue Range Resource Corp. -- has also soured international and Canadian investors on smaller companies, analysts said. "Too many junior companies have blown up," Mr. Magee of Credifinance said. But a more disturbing possibility is that investors are growing weary of the increasing risk that an increasingly exploited Western Canadian Sedimentary Basin holds. As the easy pickings disappear after 50 years of drilling, the modest returns are harder to justify when lucrative oil plays still exist elsewhere in the world, from Sudan to Azerbaijan. "The issue is there are too many intermediate and junior companies that have failed to provide a decent return given the risk undertaken," Scotia Capital's Mr. Stenason said.