Alberta regulator toughens financial test for oil, gas asset buys

By Nia Williams
CALGARY, Alberta, June 21 (Reuters) - The Alberta Energy
Regulator has toughened rules determining if companies are
financially strong enough to buy oil and gas assets, a move some
energy industry players warned on Tuesday could hamper mergers
and acquisition in the province.
The regulator announced that companies seeking to buy oil
and gas wells will need to show their deemed assets exceed their
deemed liabilities by a ratio of 2.0 or more after the purchase.
Previously, deemed assets had to be equal to deemed liabilities.
More than 200 companies that met the prior standard were
ruled out as buyers by the stricter financial solvency test
announced by the AER late on Monday. Industry representatives
said merger and acquisition activity could take a hit because
fewer companies will be allowed to buy assets.
"We have a huge market in Canada currently with buying and
selling oil and gas properties and this will put limitations on
who can participate in that pool," said Gary Leach, President of
the Explorers and Producers Association of Canada.
Under the new rules, 569 companies do not meet the AER's
criteria, versus 362 previously, including those that failed the
prior test too.
The AER is overseer of the province's Orphan Well
Association (OWA), which is responsible for cleaning up wells
that have no owners, and keen to stop companies buying assets
unless they can afford the eventual cost of decommissioning.
That means, said Leach, value of a company's production will
need to be twice the cost of cleaning up its wells at the end of
their producing lives.
The step comes in response a court decision last month that
proceeds from the sale of assets belonging to insolvent junior
producer Redwater Energy Corp will go first to secured
creditors, rather than towards cleaning up the company's
inactive oil and gas wells.
"It's impossible to gauge the impact of this regulatory
decision but I think it will be fairly disruptive (to M&A
activity)," said Brad Herald of the Canadian Association of
Petroleum Producers, adding he understood the AER was trying to
mitigate the risk of inheriting more orphan wells.
One Calgary energy lawyer, who asked not be named due to
client confidentiality, said he had heard from many angry
corporate executives who were concerned it would become much
harder for companies struggling with low oil prices to sell
assets in order to survive.
"This is a total overreaction - killing a mouse with a
shotgun," he said of the AER's move.