Counter to claims that lack of asset supply increased competition for acquisitions in Canada, there was a rapid shift from a seller's market to a buyer's market in the fourth quarter, according to Sayer Energy Advisors, a Calgary-based M&A advisory firm.

Both Husky Oil Operations Ltd. and Talisman Energy Inc. have assets for sale, representing daily combined production of approximately 23,000 barrels of oil equivalent, and Dominion Resources Inc. intends to sell its E&P business, including some Canadian assets.

There were assets involving 70,000 to 80,000 barrels equivalent of daily production for sale approaching year-end 2006, and many other divestments unannounced, bringing the total to more than 100,000 barrels equivalent per day, according to Sayer associate Ryan Ferguson Young.

Higher debt, new funding challenges and a proposed new Canadian trust tax regime are forcing producers to sell assets or consider being acquired. Some multinational companies may also add supply to the market.

"In addition to excess supply in the market, demand for seeking accretive acquisitions may not be on the minds of some players as they are consumed with other issues at hand," says Young.

Such issues include flow-through commitments. With December 31 approaching and funds dwindling, some companies didn't have the cash to continue their programs, and the need to drill wells was expected to take funds out of the M&A marketplace, according to Young.

A proposed new tax regime for the trusts is also to affect demand for assets. "Up to this point, trusts were able to pay higher premiums on acquisitions because of the tax advantage and lower cost of capital they had over conventional E&P companies. With this announcement, the trusts will be on a more level playing field with E&P companies in regards to acquisitions, valuing acquisitions on an after-tax return-on-investment basis." (For more on this, see "Tristone Capital's Capital-Markets Overview" in this issue.)

Many trusts are taking a wait-and-see approach to how the federal government's proposed new tax policy will affect them. "Traditional E&P companies might look at this as a tremendous buying opportunity as the parties who felt recent acquisition metrics were too high may be able to complete transactions more within their comfort level."

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