We're sorting out who will be predators and who will be prey in two of Western Canada's most promising new oil and gas regions.
The latest sign of the pecking order comes from ARC Energy Trust, which staged a friendly $680-million takeover of Storm Exploration last week. ARC showed it plans to be a dominant force in west-central Alberta's Montney region, where new drilling techniques are opening up a massive natural gas play. EnCana and Shell Canada are also expected to have something to say about who dominates this part of the world.
In Saskatchewan's Bakken play, the horizontal drilling techniques are much the same, and there's also an outsized amount of gas trapped under the prairie. Here, names to be reckoned with include PetroBakken and Crescent Point.
If these mid-sized to major energy companies are the predators, who are the prey?
Well, the list of potential takeover targets is long, as both regions are chock-a-block with private companies and junior energy plays, many of which are listed on the TSX Venture exchange.
Ever heard of Tundra Oil & Gas? It's a private company, owned by the Richardson family in Winnipeg. Tundra has emerged as one of the largest landholders in the Bakken region. While there's no sense the company is for sale, the scale of the holding shows this generation of Richardsons inherited a deft investing touch.
Then there's Birchcliff Energy, a favourite holding of financier Seymour Schulich. This mid-tier company was early to Montney and holds promising properties, as Mr. Schulich is quick to tell anyone willing to listen.
Given the number of players in these regions, private and public, trying to predict who gets taken out next is a mug's game. One Calgary analyst who follows the sector closely joked that the next five deals coming out of Montney and Bakken could all involve companies no one has ever heard of.
However, there are a number of characteristics common to oil patch takeover targets. And some of signs are easy for any investor to read, if they have access to a decent map.
The first clue on who buys whom is where properties line up. When a senior player owns promising natural gas fields next door to a junior's holdings, you don't have to Sherlock Holmes to guess what might be coming. ARC's holdings in Montney have a jigsaw puzzle fit with those of Storm Exploration.
The next test, on public companies, is balance sheet. Weak natural gas prices have left junior and mid-tier companies that financed operations with debt in dire straits. Many are having trouble selling enough gas to make interest payments. Lenders are getting impatient. So debt-heavy energy companies with decent reserves are natural takeover targets. (Conversely, well-financed companies in these regions would prefer not to sell at a time when commodity prices are relatively low.)
One final clue to potential takeovers is the mindset of management and boards. This can be is difficult for outsiders to crack, but management's intentions tend to be an open book within the oil patch.
There's a well-defined breed of energy executive who enjoys the wealth-creation exercise of finding new reserves, but has no interest in the daily grind of running a producing oil and gas company. When a management team that's built, then flipped, three or four energy companies shows up at a new junior play, the clock is ticking on a deal.
Which brings us back to Storm Exploration, and the deal with ARC. With help from their advisors at First Energy Capital, the Storm team sold their Montney holdings, but spun out a yet-to-be named exploration company. Storm's managers are planning to start all over again, with $40-million of cash and untapped land holdings in what's known as the Horn River Basin, in northeastern B.C. If Storm's brain trust has it right, then in a few years' time, the predators and prey may be circling one another again.