With meeting new reserves definitions behind them, as a result of NI 51-101, many Canadian producers are resuming their business of portfolio growth, while some have put themselves on the market. Calgary-based investor-relations and consulting firm Iradesso Communications reports that since January 1, more than a dozen among the 68 Canadian producers that began the year have since been purchased or merged and 15 new ones have been formed. "The usual life-cycle of a junior in western Canada is three to five years, with production growth from zero to 1,000 or 2,000 BOE (barrels of oil equivalent) per day...The management normally parachutes out of the transaction and starts again," Peter Knapp, Iradesso president, writes in "Canadian Juniors" in this special report on Canada. Start-ups are being purchased by royalty trusts or in some cases by U.S. independents that are looking for growth opportunities in the Western Canadian Sedimentary Basin. U.S. companies have been net sellers, however, and some are finding their assets fetching tremendous premiums. In one recent transaction, the western Canadian divestment by U.S.-based Murphy Oil, the buyers paid historically high prices: an implied average of C$18 per proved BOE (after royalties). Paul Cheng, an analyst with Lehman Brothers, calls it "an alarming high price." Knapp says, "If oil and gas prices continue to stay at historically high levels, these trusts will continue to enjoy exceptional access to capital and will use that to buy up juniors to replace their reserves and production. Conversely, if commodity prices were to weaken for a sustained period, the royalty trusts would need to deal with lower distributions and cash flow." Analysts with Calgary-based investment-banking firm FirstEnery Capital Corp. report, "The valuations of Canadian junior and midcaps are influenced by expectations of royalty trust-type metrics either by way of reorganizing or acquisition. The Canadian environment is even more competitive than the U.S. market." Consolidation among trusts is expected, as not all trusts are performing equally. The royalty trusts' total returns during the first quarter of 2004 have been disappointing, compared with their 12-month returns, according to William Lacey, one of the FirstEnergy analysts. "What hasn't helped are the interest-rate concerns out there," Lacey says. U.S. Federal Reserve Chairman Alan Greenspan is hinting that the U.S. federal funds rate may be pushed higher in coming months. Trusts compete with money-market and other secure investments for dollars. Some trust investors are getting skittish that they may need to redirect their assets. But it would take a significant upward push in interest rates to make cash investments more attractive: the 12-month total returns (unit-price improvement plus distributions through March 31, 2004) of the 14 Canadian trusts that Lacey covers have ranged from 74% to 13%. In this range, trusts' competition would be more likely with loan-shark investing. "Investors should be more concerned with commodity prices," Lacey says. The market price for oil and gas more greatly affect royalty trusts' total returns than interest rates. -Nissa Darbonne, Executive Editor
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Oil Unlikely to Break Above $100/bbl This Year, J.P.Morgan Says
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Iraq's Ambition to Match Saudi Oil Output is Out of Reach
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