CALGARY -- The consolidation of the junior oil and gas sector continued yesterday when Iteration Energy Ltd. said it will take over Cyries Energy Inc. in a $429-million all-stock deal.

The merger will create a stronger company, with a current market capitalization of nearly $700-million and with production of about 20,000 barrels of oil equivalent a day, that's big enough to make acquisitions, said Iteration chief executive officer Brian Illing.

"This is very much a combination of two strong companies," he said in a conference call. "As a company, we're poised to be opportunistic around the [Western Canada sedimentary] basin."

Canada's junior oil companies have been struggling after a downturn in natural gas prices in 2006 and 2007 took the wind out of the sector's sails. Rising drilling and exploration costs, coupled with the prospect higher oil and gas royalties in Alberta, have put pressure on the sector and led firms to seek a way out.

However, the federal government's decision to tax income trusts has taken away the traditional exit route for a junior - selling up to an energy trust. Consequently, more smaller companies have merged as they seek the critical mass required to survive.

Under the terms of the deal, each Cyries shareholder will receive 1.475 shares of Iteration for each Cyries share held, representing a premium of 5 per cent against Friday's closing share prices. Iteration will also assume $134-million in debt. "This gives them more tools in the toolbox to go out and do what they do best," said Kim Page of Wellington West Capital Markets. "They're combining to get bigger to go out and take advantage of asset acquisitions. I think they will become a consolidator."

Both firms have operations in the Peace River Arch in northwestern Alberta and in northeastern British Columbia.)

ITERATION ENERGY (ITX)

Close: $4.79, down 46¢

CYRIES ENERGY (CYS)

Close: $6.90, down 49¢