Calgary-based investment banker Sayer Securities Ltd. anticipates increased Canadian M&A activity as a result of the Alberta Securities Commission's (ASC) new reserve reporting guidelines-National Instrument 51-101. The new rules, which could result in reserve write-downs and reclassifications, may affect borrowing capacity, especially among smaller companies whose bank loans are issued on the basis of their proved producing reserves. Those ending up with a higher percentage of nonproducing reserves than they currently hold may sell some to improve the ratio. "The rumblings on the street are that any reserve write-downs at the end of 2004 could lead to a subsequent detailed review of both the reporting issuer and its independent engineer by the ASC," says Tom B. Pavic, an analyst with Sayer Securities. "Consequently, the independent engineers may be aggressively cutting reserves this year on properties that have not recently met forecasts, with a view to applying an overly negative revision for the end of 2003 so that future reserve revisions are positive rather than negative." He expects many reserves that are classified as proven may need to be reclassified as probable. Publicly held Calgary-based producers follow ASC guidelines when reporting reserves. Public U.S. companies follow U.S. Securities and Exchange Commission rules, which differ from the ASC's. Pavic expects the buyers of the nonproducing reserves that come onto the market will be private companies that are not affected by NI 51-101. The new rules will result in fewer "train wrecks that have given the industry a black eye," he adds. Several Canadian producers-such as Promax Energy Inc., Gauntlet Energy Corp., Rapidfire Resources Ltd. and Shenandoah Resources Ltd.-are under creditor protection or receivership because of debt out of sync with their proven reserve base. Overall, Pavic looks forward to the new rules. "This better disclosure will allow for more consistency on reserve values amongst firms and allow investors to feel more comfortable investing in a company. This higher comfort level for investors could lead to firms having more financing available, allowing them to be more proactive on the acquisition front." -A&D Watch

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