Why “Time Is on Their Side” in 2011
PART 1 OF A 2 PART SERIES…
What mergers and acquisitions will happen in the Cardium oil play in 2011?
In the last half of 2009 and the first half of 2010 the Cardium was the hottest play in Canada. Valuations moved up quickly through late 2009 and the buyouts started with Daylight Energy (DAY-TSX) buying Highpine.
Then valuations exploded into 2010 as Petrobakken (PBN-TSX) announced – on the very first day of trading, January 4 – the first of its three takeovers of junior Cardium players, which would happen over three months. Daylight would also buy one more company, West Energy (which was an 80% win for OGIB subscribers in just a few months..)
The reason for all the excitement was that the Cardium has produced more oil than any other formation in Canada – it’s BIG, arcing over 1000 km along the Rocky Mountains in Alberta.
And the oilpatch just realized that a well known but previously unproductive, tight zone in the Cardium – the A Zone – was now economic, thanks to horizontal drilling and multi-stage fracing.
Here was a well known zone that had no exploration risk – it had been drilled through many times as producers went after the deeper B Zone, which was easier to produce from with regular vertical wells. The Cardium A Zone quickly became Canada’s second big tight oil play after the Bakken in Saskatchewan.
There was a Cardium mania for the first three months of 2010 as the BIBA machine – Brokers, Investment Bankers and Analysts – and investors, remembered the billions of dollars they made off junior and intermediate producers in the Bakken as it was developed in the last decade. Cardium stocks soared.
And now, in December, the market can say that well results have borne out earlier investor enthusiasm. But there was a lot of scepticism in the markets through the spring and summer. (Alberta Bakken investors take note!)
The word on the Street – rightly or wrongly – was that Petrobakken overpaid a lot for those companies, and its stock was hit hard.
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Between the Petrobakken hangover and the soft market for junior oil stocks in Canada during the spring and summer, most of these junior Cardium producers didn’t see their stocks get back to the levels they hit during the January mania until late in the year. And there has been no M&A activity since Petrobakken’s buying spree ended.
Scott Ratushny, CEO of junior Cardium producer Midway Energy (MEL-TSXv) says 2011 could see more corporate activity in the Cardium, but it depends on what the buyer is looking for.
“I think some of the trusts coming out of the “trust mode” are looking for a focus, but most companies in the Cardium aren’t pure Cardium players, or even a pure oil player,” he says. “They might be 30% oil or 20% weighted to Cardium. That may be too much ‘noise’. I think all the pure plays will eventually get bought up.”
Energy analyst Kevin Shaw from Wellington West Capital Markets in Calgary says that junior Cardium producers aren’t in a rush to get bought out, as “all the players are seeing the play getting better as improvements / technology evolve.”
“And for those players holding key acreage positions, time is on their side to get higher takeout prices, not lower. Some guys have had the ability to sell but have decided not to because time is on their side.”
Shaw adds that M&A activity will pick up in 2011 because companies can’t get big land positions in the Cardium unless they make an acquisition with existing land holdings. Buying land from crown land sales is not really an economic option with prices through the roof, nor is there enough crown land available within the play, he says.
“Skywest (SKW-TSXv) Midway, Bellatrix (BXE-TSX), etc. – these guys will all be candidates for takeouts and I fully expect the Cardium to attract top tier takeout valuations, given that it is a repeatable oil play which the bigger players like, and require, for longer term sustainable growth,” says Shaw.
Vero Energy is one of several gas weighted juniors who discovered they had dozens of sections of Cardium lands as the play got popular. The new Cardium oil play literally saved a lot of gas producers in Alberta from an ugly 2010. CEO Doug Bartole said much of the Cardium has “been held for years; it’s in the heart of the old oil patch.”
He said they recently bought one section, but that no big land packages are left – which lends credibility to Shaw’s contention that any new entrants will have to buy their way in.
Read Part 2 my Cardium Oil series here.