CALGARY - The costs of exploring for, developing and acquiring oil and gas reserves in Canada could drop by as much as 35 percent this year with drilling activity dwindling as companies cut spending, brokerage FirstEnergy Capital Corp predicted on Friday.
The drop in costs comes just as oil prices are recovering and financial markets are thawing, pointing to a possible increase in merger and acquisition activity, FirstEnergy analyst Darren Engels said.
Finding, development and acquisition costs in Western Canada -- a key energy supply source for the United States -- could be C$16 ($14.29) per barrel of proved and probable oil equivalent reserves in 2009, FirstEnergy forecast.
That would represent a decrease of 25 percent to 35 percent from 2008, it said.
The figures are for the small, mid-cap and energy-trust sectors, which are most representative of the costs of operating in British Columbia, Alberta and Saskatchewan, as larger players tend to have more international operations, Engels said.
Equity and debt financings are increasing in the sector, which had endured runaway cost inflation as oil prices surged above $147 a barrel last July, then was forced to rein in spending as crude fell below $34 by the end of 2008, he said.
Oil has since climbed back above $60 a barrel. Natural gas prices remain weak below $3.60 per million British thermal units due to a North American supply glut.
The banks are starting to go though their process of renewing bank lines and it looks like there have been some reductions but not as much as we anticipated, Engels said. And you're starting to see new equity deals ... so I think the market is easing up.
Small-cap oil stocks have rallied since the end of March, but still trade at big discounts to mid-cap players and trusts, which points to takeover activity, he said.
The most vulnerable are those carrying high debt loads, Engels said.
Meanwhile, Canadian large-cap energy stocks, which have generated a return of 30 percent so far this year, may deliver another 10 percent through the remainder of 2009, FirstEnergy said.
($1=$1.12 Canadian) (Reporting by Jeffrey Jones; editing by Peter Galloway)