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Petro-Canada Holds Firm on Canada Southern Offer

Petro-Canada held firm last week on its US$113 million ($7.50/share) hostile takeover offer for the shares of Canada Southern Petroleum despite the sudden increase in Canada Southern shares to a high of $9.35 last Wednesday.

"Petro-Canada also continues to talk about the premium they are offering to Canada Southern shareholders, yet as of today's market close Petro-Canada's offer sits at an 18% discount to Canada Southern's stock price," Canada Southern Chairman Richard McGinity said last Tuesday. "Moreover, the Petro-Canada offer was opportunistically timed to coincide with a short-term drop in the Canadian junior oil and gas sector generally, and Canada Southern's share price, specifically."

He said Canada Southern will dig in its heels and fight the legal action taken by Petro-Canada to deny the use of a poison pill. "We think it is premature for Petro-Canada to be pursuing legal action to strike down a shareholder rights plan that is designed solely to provide the board sufficient time to surface appropriate value for Canada Southern shareholders," said McGinity. "This is entirely consistent with the coercive nature of Petro-Canada's conduct throughout this process.

"There is nothing in Petro-Canada's press release that changes our view that Petro-Canada's offer is financially inadequate and fails to recognize the economic and strategic value of Canada Southern's Arctic assets," he said.

McGinity said the company stands firm on its 927 Bcfe estimate of its Canadian Arctic Islands gas resources. The estimate is 68 times greater than its current 13.7 Bcfe of proved and probable reserves. The Calgary-based company has producing assets in the Yukon Territory, in northeastern British Columbia and in southern Alberta, but the company also holds about 39,000 net acres in the Canadian Arctic Islands.

"In between receiving ultimatums from Petro-Canada we repeatedly sought to understand their methodology for quantifying and valuing our assets. They refused to provide either their own estimate of the potential resource or to discuss the valuation methodology on which they were basing their offer," said McGinity.

Despite Canada Southern's insistence on the value of its Arctic assets, it's clear they remain distant from any conceivable development plan (see NGI, May 29).

"When Canada Southern shareholders review the Petro-Canada offer and consider the future challenges of Arctic development, we believe they will find our offer is fair and recognizes the value of all the company's assets including the Canadian Arctic Island assets," said Kathy Sendall, senior vice president of North American natural gas for Petro-Canada.

Petro-Canada, the single largest leaseholder in the Canadian Arctic Islands with 187,000 acres, has no development plans of its own in the works. "Challenges such as technology, fiscal regime, financial strength of potential partners, commodity prices and time to initial production mean no assurances can be given that these assets will be developed in a reasonable time frame," the company said in a statement.

"Significant consolidation of the existing diverse ownership in the various Canadian Arctic Island Significant Discovery Licenses will be required before any operating agreement can be entered into and development plans proceed. However, as the single largest leaseholder and likely operator in Canada's Arctic Islands, Petro-Canada would be the logical company to initiate future development -- if and when future conditions are supportive."

The Arctic natural gas resources are located far from any potential market. There has been some speculation that Petro-Canada could build a liquefaction plant in the far north and ship LNG to its proposed Cacouna Energy LNG import terminal in Gros Cacouna, PQ. LNG also potentially could be delivered to a regasification plant in the Mackenzie Delta and the gas then shipped to markets in Alberta and the Lower 48 states. But such a proposal would take many years to complete.

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