Ann-Marie Fleming www.OilandGasStockNews.com, www.NaturalGasStocks.com
August 2006

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M&A activity is not new for the oil and gas industry, especially with the increased emphasis on building domestic oil and gas supplies to encourage energy independence. Mergers and acquisitions enable companies to increase their scale, reduce costs, as well as improve their access to capital, equipment, valuable labor and expertise, which in turn leads ideally to increased production levels. These factors have led many industry participants, from small cap to large cap, to discover growth opportunities from both inside and outside of M&A transactions as they work to increase shareholder value.

The impacts that consolidation and its driving factors have on the industry and its participants are significant as seen through the activities, and overall corporate strategies from companies such as Anadarko Petroleum Corp. (NYSE: APC), Eden Energy Corp (OTCBB: EDNE), and ConocoPhillips (NYSE: COP).

According to John Felmy, API’s Chief Economist, “You need to have scale to be able to bear the risks that you are going to need to be able to refine, produce deliver etc. It also helps companies to diversify their portfolio by finding a complimentary firm and increasing overall scale. It is also a cost-reducing mechanism. If you can bring together firms that have overlapping departments you can dramatically lower your costs.”

Recent deals such as Anadarko’s proposed $23 billion acquisition of Kerr-McGee Corporation (NYSE:KMG) and Western Gas Resources, Inc., (NYSE:WGR); as well as Energy Partners Ltd (NYSE: EPL) $2.2 billion agreed purchase of Stone Energy Corp (NYSE: SGY), illustrate the value placed on consolidation as a key strategy for long-term growth.

Upon the announcement of Anadarko’s acquisition plan, Anadarko’s President and CEO Jim Hackett stated, “The core assets being acquired strongly complement Anadarko’s existing properties, providing the scale and focus needed to deliver more robust, predictable and efficient growth. Together, these acquisitions create a more focused portfolio, which will enhance our ability to deliver very competitive growth rates and returns.” These acquisitions, according to the Company, support Anadarko’s overall growth strategy that focuses on unconventional resource development and high impact exploration.

From the perspective of the small to mid cap arena, opportunities exist on a variety of levels. Philip McPherson, Director of Research, C.K. Cooper & Company describes, “small cap E&P companies that consistently find new deposits of oil and gas at the cheapest finding costs will be the next M&A target. With that said, those small companies that face cost overruns risk running out of funding and or diluting current shareholders, until they reach that point when their idea becomes proven. Once proven, the big companies have so much cash they will pay a multiple of the smaller companies current value to gain access to valuable property and or drilling sites.”

Smaller companies operating in this space often benefit from valuable asset sales that result from mergers as the new entities may offload assets that do not necessarily fit into their new core focus. “We have seen smaller firms benefiting from the consolidation of larger firms as it can help them in terms of size and acquiring assets for reasonable prices,” states Felmy.

Donald Sharpe, President of Eden Energy Corp (OTCBB: EDNE), an exploration and developer focused on large-scale oil and gas projects with significant resource potential describes, “It’s not surprising to see some consolidation in our industry. Finding costs are increasing as costs for virtually all oilfield services have gone up. This, combined with the fact that the size of new discoveries continues to drop, means that companies often feel they can buy reserves cheaper than they can find them. We have long believed that to be successful companies must build their projects internally rather than following the herd, so that land positions have been established before competition arrives. For Eden Energy, this means we have an attractive set of prospects that have large resource potential, and with success, a lot of development locations. We think that’s just the kind of assets this market will find attractive.”

Boosting North American Oil and Gas Supply:

Moving forward, as conventional resources continue to deplete, unconventional supplies such as Coal Bed Methane has become one of the key solutions to the rising energy demands. This shift has many firms establishing growth strategies that involve the acquisition and development of unconventional plays.

While ConocoPhillips (NYSE: COP) has significant international developments that the Houston-based company continues to expand upon through acquisitions, the Company is also heavily focused on building its domestic production. According to Jim Mulva, Chairman and Chief Executive Officer, “If you take what we are spending around the world as a company and look at the 2006-2010 timeframe, both exploration and production and the downstream part of the business, approximately half of our worldwide spending is going to North America.”

In light of Conoco’s domestic priorities, in March of this year Conoco completed its acquisition of Burlington Resources, a transaction valued at over $35 billion to help grow and strengthen the Company’s North American position.

Mulva commented, “ConocoPhillips has expanded its portfolio of high-quality, low-risk, long-life gas reserves, and enhanced its position as a leading producer and marketer of natural gas in North America. Overall, our North American gas supply position is strengthened both in the near term, through projects involving conventional and unconventional resources, and in the long term through LNG and Arctic gas projects. ConocoPhillips also has gained well-recognized technical expertise that, together with our existing upstream capabilities, will create a superior organization to capitalize on the expanded asset base.”

ConocoPhillips has also seen recent success through its joint venture with Anadarko, revealed in a July 14th corporate announcement indicating that a discovery and testing from the Qannik accumulation, a satellite oil field overlying the Alpine oil field on the North Slope of Alaska, has shown an average production rate of 1,200 barrels per day over a 19-day testing period. Conoco operates and holds a 78 percent interest in the Alpine field and its satellites, with Anadarko holding a 22 percent interest.

Canada Oil Sands

As a result of new technology that makes extraction feasible given the high price level per barrel of oil, Canada’s Alberta Oil Sands has leaped into the industry spotlight. According to the EIA, North American production growth is dependent on two key factors – hurricane recovery and the development of the Canadian Oil Sands. Canada’s oil sands, which are estimated to be second in reserve size only to Saudi Arabia, have generated a significant inflow of investment and development in this region.

This boom in turn has led to increased costs for labor, equipment, material, leases etc. Many companies in an effort to gain position, while at the same time minimizing or reducing costs, have turned to mergers and acquisitions as a key strategy for growth versus new project development.

Recent deals include Shell Canada’s (TSX: SHC), $2.4 billion (CDN) acquisition of BlackRock Ventures (TSX: BVI), an oil sands producer operating exclusively in Canada with projects located alongside Shell’s operations in this region. There is also the bidding war for Canada Southern Petroleum (NASDAQ: CSPLF; TSX: CSW) that has involved Petro-Canada (NYSE:PCZ), Canadian Oil Sands Trust (TSX - COS.UN) and Canadian Superior Energy, Inc. creating an industry buzz.

With labor pool pressures and rising costs, consolidation is becoming more prevalent as it is often the larger companies that will be able to attract the necessary workforce and equipment to fully develop their oil sand projects.

Despite the costs, investments keep coming. As Brian Jean, representative for the region in Canada’s parliament stated, “I think it’s bigger than a gold rush. We’re expecting $100 billion over the next 10 years to be invested in this area.”

Ann-Marie Fleming
Ann-Marie Fleming completed her MBA in the United States, where she attended Webster University. She also holds an Honors B.A from the University of Toronto. She has over sixteen years of experience within the financial industry to include retail banking and brokerage, investment banking, and mortgage brokerage within the United States and Canada, with a firm background in corporate research.

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