Canadian junior oil and gas companies are being sold sooner than their predecessors, according to Calgary-based investment-banking and research firm Sayer Securities Ltd. "Contributing factors to this new trend include the increased buying presence of royalty income trusts, the maturing of the Western Canadian Sedimentary Basin and public markets focusing on short-term results," says Frank Sayer, principal. Seven-year-old Poco Petroleums Ltd. had production of 122,000 barrels of oil equivalent (BOE) per day when it was sold in 1999. Its president, Craig Stewart, then started Meota Resources Corp. It was sold in October, having production of 11,450 BOE per day, to Provident Energy Trust Two other companies were sold to royalty income trusts (RITS) in third-quarter 2002: Ketch Energy Ltd. (10,733 BOE per day) was bought by Acclaim Energy Trust, and Advantage Energy Income Fund purchased Best Pacific Resources Ltd. (2,067 BOE per day). RITS continually need to replace declining production from their existing assets, Sayer says. "They also represent a key buying segment due to their nontaxable nature. In addition, RITS currently have good access to the capital markets, which contributes to their competitive advantage as buyers." Shareholders who invested in Meota, when the former Poco management team took over, received an average annual return of approximately 36%, as the shares increased from C$2.30 on January 20, 2000, to C$4.60 in August 2002. In comparison, the Toronto Stock Exchange's Oil & Gas Producers Index had an average annual return of about 19% during a similar time period. "It looks like the trend to a shorter life cycle will continue, as the high level of corporate-merger activity during the last two years has led to a resurgence of re-starting management teams who are experienced in the growth-and-exit strategy," says Sayer. Also, trusts' need for acquisitions is growing: half the value of public Canadian companies with market capitalizations of C$100 million to C$5 billion are RITS, he adds. -A&D Watch
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