August 4, 2008 / 12:36 AM / 9 years ago

Big resource players are thinking small

CALGARY, Alberta (Reuters) - Acquisitive major resource companies are thinking small, and it’s generating some big buzz.

Niche players in Canadian oil, gas and mining that were scarcely known outside their home base have attracted the attention of major corporations, and generated hefty takeover returns for their investors.

Case in point: Royal Dutch Shell Plc, one of the world’s largest oil companies, last month offered nearly C$6 billion ($5.8 billion) for Duvernay Oil Corp to scoop up Duvernay’s unconventional natural gas prospects.

That represented a fat 42 percent premium to Duvernay’s stock price before Shell made the offer.

The commodities boom is expected to yield more bids as previously uneconomical resource plays -- such as the red-hot tight-gas prospects that Duvernay specialized in, or Alberta’s oil sands -- become the domain of the big boys.

“Because of the high price for some of these commodities, this is something that’s going to happen,” said John Kinsey, portfolio manager at Caldwell Securities Ltd in Toronto.

Hundreds of junior oil and gas companies, for instance, crowd the market and many have acreage and technical expertise in such coveted areas as the Montney gas prospects in northeastern British Columbia and the Bakken oil deposits in southern Saskatchewan, Kinsey said.

“That’s really quite a glut, so I think that going forward there will be mergers and acquisitions in that area,” he said.

Two weeks ago, mining heavyweight Barrick Gold Corp reached outside its industry with a C$410 million acquisition of junior oil and gas producer Cadence Energy Inc, scuttling an offer from another energy firm.

Barrick touted the transaction as a hedge against surging energy prices.

“You want to have some sort of control of the cost because if it gets away on you, then it hurts the bottom line,” said Adrian Mastracci, portfolio manager, at KCM Wealth Management in Vancouver.

“I think it’s a good strategic acquisition for a company like that and I wouldn’t be surprised if other companies try to do something similar because, as we all know, energy, no matter how you measure it, is getting more costly.”

And it’s getting harder to acquire big Canadian names.

This past week, the mining sector moved closer to losing yet another firm. Teck Cominco Ltd said it will buy Fording Canadian Coal Trust for C$14.1 billion to consolidate its ownership of several British Columbia metallurgical coal mines.

The deal follows recent absorptions of Canadian mining stalwarts Inco and Falconbridge.

In oil and gas, top firms such as Canadian Natural Resources Ltd or Talisman Energy Inc would now be big bites for even the energy majors.

Bay Street players said a recent pullback in the stock market from highs in June may help spark another run on the smaller resource names with niches in key prospects.

The TSX energy group ended the week at 383.9 points, down 22 percent from the high it set on June 18. The overall S&P/TSX composite index closed on Friday off 96.38 points at 13,496.53, or 10 percent below its June highs.

Much of that fall has been blamed on a drop in crude prices to below $125 a barrel from nearly $150 -- less expensive but still anything but cheap.

“There’s going to be some asset plays or some company plays that the larger company will go for,” Mastracci said. “In many cases they’re getting some good value -- they’re looking for things that fit into their game plan.”

In the upcoming week, second-quarter results are expected from a mix of flush energy producers and struggling fuel consumers. Canadian Natural and Penn West Energy trust are due to report on Thursday, and Air Canada releases its results Friday.

($1=$1.03 Canadian)

Editing by Peter Galloway

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