Canadian merger and acquisition activity - which surged in 2004 - will continue to play an important strategic role for the energy sector and other industries this year, experts say, even though mega-deals will likely be few.

Sayer Securities Ltd. says that based on the numbers coming out of 2004 and what has been cooking early this year, it anticipates robust merger and acquisition (M&A) activity in the oilpatch during 2005.

The Calgary-based firm believes that a ready supply of capital for income trusts and both junior explorers and producers make both willing and able buyers.

"I don't know if (2005) will be a bigger year than 2004, because we had some pretty big deals last year," says Brent Heinz, associate with Sayer Securities. "I would say that M&A activity will continue to be strong, but I wouldn't say that it's going to double."

Some of the deals already in the works this year include NAL Oil & Gas Trust teaming up with Manulife Financial Corp. to buy Addison Energy Inc.'s Canadian oil and gas assets for $550 million.

In addition, Argo Energy Ltd. and Lightning Energy Ltd. announced plans to merge to form Sequoia Oil & Gas Trust and a public exploration company, White Fire Energy Ltd.

The company expects that acquisition prices for reserves will remain at current levels or climb slightly higher. However, the growing number of income trusts will likely mean the prices being paid for production will increase more dramatically in 2005.

The average acquisition price for Canadian oil and gas reserves soared to record levels last year, increasing by 41 per cent to $12.80/barrel of oil equivalent (boe) in 2004 from $9.08/boe in 2003. Heinz said that was the highest price recorded since Sayer Securities began tracking M&A activity in the late 1980s.

Commodity prices - both oil and natural gas - proved to be the main factor influencing acquisition prices in recent years.

In 2000, the average price for Edmonton par oil was $44.33 Cdn/barrel (bbl) compared to $52.54/bbl last year.

Natural gas prices have increased during the same period, averaging about $5.02/million British thermal units (mmbtu) in 2000, compared to $6.79/mmbtu in 2004.

Heinz doesn't believe that higher per-boe acquisition prices will deter companies from buying reserves rather than exploring for them.

"I don't think the increase is going to have a big impact on M&A activity in the energy sector. The (acquisition) price has increased, but it also depends on what your finding and development costs work out to be," he says.

Peters & Co. chairman Michael Tims also foresees steady M&A action in 2005.

Like his colleagues at Sayer Securities, Tims looks to income trusts to be the most active corporate raiders in the oilpatch, acquiring both assets and smaller companies. In fact, he notes, many of the small juniors being created start with the express intention reaching a certain production level or dollar-value amount in the hopes of being bought out by a trust or explorer and producer.

But despite the buzz on the streets, industry watchers shouldn't hold out much hope of seeing a mega-deal unfold this year, he says.

"We all hear the rumours, but have yet to see a substantial transaction," Tims says. "Obviously Husky is a regular in the rumour mill (of being bought by the Chinese), and then there is the ... speculation that Shell might be looking at EnCana. So there are various and sundry rumours, but there still haven't been many substantial transactions."

Higher M&A activity hit the different economic sectors across Canada in 2004.

According to recently released data from Toronto-based investment bank Crosbie & Company Inc., there were 859 announced transactions valued at $115 billion in 2004, compared to 833 transactions for $83 billion in 2003.

Contributing to the increase were 25 transactions over $1 billion, which totalled $52 billion, compared to 12 mega-deals valued at $38 billion in 2003.

Financial groups - including pension funds in Canada and the U.S. - were active buyers in 2004, representing about 15 per cent of the total transaction value. Private equity groups were the buyers in four of the 25 mega-deals, including Kohlberg Kravis Roberts & Co.'s $3.1- billion acquisition of Masonite International Corp. and Bain Capital LLC's $2-billion purchase of SuperPages Canada.

Income trusts also weighed in, accounting for about five per cent of the year's total transaction value.

"I think we're seeing a reflection of liquidity; there's a huge amount of pent-up liquidity on both sides of the border," says Colin Walker, Crosbie managing director. "The private equity markets in general are enormously large and a lot of people don't factor them into their thinking."

Crosbie - which maintains an extensive databank on M&A activity - points to the energy sector as the strongest-by-dollar volume last year at $24 billion, a sharp increase from the $9 billion recorded in 2003.

The industrial-products sector was the most active by number of transactions, with 205 compared to 183 the year prior, although dollar volume only increased one per cent to $16 billion.

Consumer products saw dollar volume increase significantly to $13 billion from $3 billion in 2003 due to three mega-deals, including Molson Inc.'s $4.5-billion acquisition by Adolph Coors Company.

The gold and silver industry saw dollar volumes by M&As rise by 280 per cent, while utilities recorded a dollar- volume increase of 130 per cent.

Communications and media also had a strong year with a nine-per-cent increase in transaction value to $11 billion.

"In M&A you've got a situation where we've had a period of relative stability ... no major shocks," says Walker. "And I think people in the business world are relatively comfortable with the geopolitical landscape - Iraq notwithstanding."

Cross-border activity, meanwhile, remained strong last year, representing 50 per cent of the total number of transactions and 70 per cent of total deal value, Crosbie reports.

Nineteen of the 25 largest deals had an international component last year, which saw the dollar volume of cross- border transactions increase to $81 billion from $62 billion in 2003. The number of cross-border deals also increased by 17 per cent to 427.

Canadian companies continued to have a strong appetite for foreign companies, making 312 purchases valued at $59 billion, nearly triple the number and value of foreign acquisitions of domestic companies, Crosbie says.

The main target market was the U.S., where Canadian firms made $37 billion in acquisitions, a 34-per-cent increase from the prior year.

That Canadian firms are active corporate buccaneers shouldn't come as a surprise, Walker says.

Since NAFTA came into effect a decade ago, acquisitions of U.S. assets and corporations by Canadians have continually outstripped American raids on corporate Canada.

"The reason for that is pretty simple: Canada is a small market and companies are facing global competitors, and for both of those reasons it's attractive for them to try to establish beachheads internationally to give them critical mass so you're spreading your fixed costs of running a business over a broader base," he says.

(John Ludwick can be reached at ludwick@businessedge.ca)