Investors think bigger is better in the oil and gas game

    CALGARY, Sept. 10 /CNW/ - Junior oil and gas companies had higher
production growth, higher operating margins and lower debt ratios in the
second quarter of 2008 than their intermediate peers, but investors gave the
bigger companies a significant premium in the stock market, a report released
Wednesday shows.
    The quarterly iQ Report by Bryan Mills Iradesso, an investor relations
firm, shows that the enterprise value of the average junior oil and gas
company from April through June 2008 was $56,574 per barrel of oil equivalent
(boe) compared with $75,235 per boe for the average intermediate company. The
enterprise value per boe is the company's market capitalization plus its net
debt divided by its average production rate for the period.
    Bryan Mills Iradesso tracks the performance of junior and intermediate
oil and gas companies and trusts that operate primarily in Western Canada and
trade on the TSX and TSX Venture Exchange. The comparison, released quarterly
and made available free to investors, defines juniors as companies that
produce between 500 and 10,000 barrels of oil equivalent per day (boe/d) and
intermediates as companies that produce between 10,000 and 100,000 boe/d.
Bryan Mills Iradesso's latest report compares the results of 63 juniors and 24
intermediates for the second quarter of 2008. Information is also provided on
international companies, oil sands players and emerging producers.
    Evidence that size matters for investors is also clear when looking at
annualized cash flow multiples for the sector. Using August 29 share prices,
the average enterprise value in the second quarter equated to 4.0 times
annualized cash flow per share for the juniors while the intermediates traded
at 5.8 times annualized cash flow per share. Simply dividing the share price
by the cash flow per share shows the same result. The juniors traded at 3.2
times annualized cash flow per share in the second quarter while the
intermediates traded at 4.2 times annualized cash flow.
    Peter Knapp, president of Bryan Mills Iradesso, says the considerable
market premium for intermediates becomes even more intriguing when the second
quarter operating results for the sector are examined closely.
    Junior oil and gas companies had a higher percentage of overall
production growth, increasing their production on average by 4% while the
average intermediate did not deliver production growth. Juniors had slightly
higher cash flow per barrel of oil produced, with median netbacks of
$38.08/boe in the second quarter versus $37.43/boe for the intermediates.
Juniors also had lower net debt of 0.7 times cash flow in the second quarter
compared with 1.3 times for the intermediates.
    "It pays to be an intermediate," said Knapp. "The recent decline in share
prices and the gap between the market valuations of the juniors and
intermediates suggests we're in for a round of consolidations and mergers."
    If commodity prices stabilize, Knapp expects a rush of transactions to
begin as soon as this fall.
    "Stable commodity prices would allow buyers and sellers to agree on
valuations of assets, something they can't do when the underlying commodity
prices are moving around rapidly," he said.
    Other highlights of Bryan Mills Iradesso's latest iQ Report, which helps
guide investors in their search for companies and trusts that deserve further
research, include the following:

    -   Western Canada's 24 intermediate oil and gas producers had total
        average daily production in the second quarter of 2008 of 649,943
        barrels of oil equivalent. By comparison, the 63 juniors that met the
        criteria for inclusion in this editon of the iQ Report produced total
        average daily production of 181,609 boe.

    -   With high commodity prices and steady production, energy companies
        brought in a lot more cash per barrel of oil produced in Q2 than they
        did in Q1. The median cash flow netback for the juniors jumped to
        $38.08/boe in Q2 from $28.33/boe in Q1 while the median cash flow
        netback for the intermediates increased to $37.43/boe in Q2 from
        $30.36/boe in Q1. Dropping commodity prices mean that netbacks are
        expected to come back to Q1 levels for the rest of the year.

    -   Although the recent slide in energy share prices has been painful,
        the second quarter was a lucrative time to be investing in the
        sector. The average junior provided a total return of 37% in the
        second quarter while the average intermediate increased 34%. When the
        slipping prices of July and August are added into the mix, the
        juniors still returned 13% over the five-month period while
        intermediates returned 18%.

    -   Natural gas is still where it's at in the Western Canadian
        Sedimentary Basin. Production of the median junior was weighted 71%
        to natural gas while production of the median intermediate was
        weighted 65% to natural gas.

    Although the last few days have been hard on investors, Knapp says an
increased number of corporate and asset transactions in the energy sector
would be expected to pick up the market to reflect the valuations of those
    "If that happens soon, we will look back at today's market as a time to
have bought low so we can eventually sell high," he said. "That's the name of
this game."
    Bryan Mills Iradesso's complete iQ Report is available free to media
representatives and investors who fill out an online form on the following

For further information:

For further information: Peter D. Knapp, President, Bryan Mills
Iradesso, 400, 805 10th Avenue SW, Calgary, Alberta, T2R 0B4, T: (403)
503-0144 x202,,

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