Large and medium-size independents on both sides of the U.S.-Canadian border are still actively pursuing a North American natural gas strategy. After reading the tea leaves on gas fundamentals, they are in the hunt for undeveloped gas reserves the quick way-by visiting a data room or instigating a direct negotiation between chief executive officers. And that's not to mention the all-time-high gas-drilling rig count. Buyer activity is changing the landscape as ownership of gas reserves changes hands, points out <$iLehman Brothers >' energy team. Whereas in 1995 <$iAnadarko Petroleum > ranked 17th in gas reserves in North America, today it ranks sixth, behind <$iBP >, <$iExxon Mobil, > <$iChevron Texaco >, <$iBurlington Resources > and <$iShell. > At year-end 2000, it held pro forma proved reserves of 6.7 billion cubic feet of gas. Very low stock multiples combined with rising cash flow spell more consolidation to come. That means trouble for some, and happy headlines for others. Indeed, speakers at a recent Houston seminar on crossborder energy mergers and acquisitions indicated that at least 10 oil and gas companies in Calgary were known to be for sale in early April. "The strong commodity fundamentals, coupled with staggering industry cash flow, is sending every predator hunting, even some of the prey," say the energy analysts at <$iFirstEnergy Capital Corp. > in Calgary in a recent report, "Canadian Energy Synopsis." Not counting the recent price offered by Shell for <$iBarrett Resources, > M&A deals-especially those that are mostly gas-oriented-generally have been getting pricier. Commodity prices remain strong and buyers have more than enough cash to spend. In particular, premium prices have been paid by the Canadian royalty trusts and by U.S. buyers, and usually for gassy deals as opposed to oily ones. In this environment, any E&P stock that underperforms for any reason is immediately vulnerable-but conversely, any company that performs well looks attractive also, to the larger players. Recent M&A deal values per thousand cubic feet equivalent reflect a new paradigm, according to Greg Pipkin, head of the global energy team for Lehman Brothers. Speaking at a Houston event, he said this paradigm "reflects the outlook for natural gas prices and new hedging strategies to protect the downside. The average price paid in dollars per Mcfe in Canada is about $1.32, versus a five-year historic 90 cents per Mcfe. In the U.S, buyers have paid an average $1.46 per Mcfe, versus $1.05 historically. "You'd think this roughly 40% increase over the norm would scare a lot of companies, but it isn't true-at least not yet." Two forces are driving this activity to grow or monetize one's gas assets, according to Pipkin: to achieve greater scale and cost savings, or to further specialize in gas in North America. Stock valuations are more closely tied to M&A activity than ever. The FirstEnergy analysts report, "The universe [of 32 companies we cover] is trading very close to M&A prices, based on most recent quarterly production data. Still, if a buyer is willing to pay for a little 2001 growth, there are some bargains to be had." At <$iCIBC World Markets >, an interesting divergence of opinion is developing between the investment banking firm's U.S. and Canadian energy equity teams. The Calgary integrated team remains bullish because rising production is likely to ensure continued high net income and cash flow for the companies it follows. The U.S. E&P group, based in Houston, remains a bit more cautious. The Canadian E&P group also recommends value-based stocks because investor rotation out of technology stocks and into hard-asset resource stocks is expected to continue through 2001. In March, the last month for which full data was available, the Canadian royalty trust issues had risen 18% from their February level, perhaps giving them additional buying power. They have been active buyers of assets last year and this. Canadian intermediates and junior stocks also rose, by about 14%, because of their higher cash flows and lower trading multiples-and continued consolidation in the sector, which is, ironically, driven by those same two factors. Meanwhile, after an outstanding performance in 2000, the large-cap E&Ps have declined 14% year to date, CIBC notes. "We think an attractive buying opportunity exists because Canadian E&P stocks trade at a significant discount to their U.S. peers...Eight of the 11 Canadian intermediates and juniors we follow are trading at or less than 3.5 times 2001 cash flow estimates." Too, the analysts cite industry free cash flows that are rising on both sides of the border. Some of that money will be used for mergers and acquisitions, as well as for share buybacks and debt reduction. These trends lend credence to the recent acquisition of fast-growing Calgary independent producer <$iGenesis Petroleum > by Tulsa's <$iVintage Petroleum > for roughly C$898 million, including debt assumption. Vintage thus joins a growing rank of U.S. producers that have acquired Canadian E&P companies. (See chart.) <$iApache Corp. > certainly buys into these theories as well. Since November 1999, the Houston company has paid $1.6 billion in aggregate for three large chunks of Canadian gas-levered asset packages, from the Maple Leaf subsidiaries of Shell, <$iFletcher Challenge > and <$iPhillips Petroleum. > Going forward, the CIBC energy team expects that the next wave of consolidation will accelerate in the midsize range, to include more deals in the $100- to $300-million range of total enterprise value.