EnCana, already the largest North American independent producer, has plans to grow even larger, after announcing Thursday the cash purchase of Denver-based Tom Brown Inc. for $2.7 billion, including debt assumption. The merger quickly expands EnCana’s Rocky Mountain presence. Its total U.S. natural gas production will reach 1 Bcf/d after the deal.

Overall, 325 MMcfe/d will be added to current gas production, along with 1.2 Tcf in proved gas reserves and two million in net undeveloped acres.

With the merger, the Calgary-based producer plans to sell another $1-$1.5 billion of Canadian conventional assets. It already has sold about $380 million of non-core assets this year, and the additional divestitures will include 40,000-60,000 boe/d in current production.

However, Tom Brown’s assets will increase EnCana’s 2004 U.S. production 18-24%. Long-life, low-decline resource plays, which now account for about 67% of its North American production, will increase to 75%, and overall, North American production will be 88% of EnCana’s total production base, according to COO Randy Eresman.

Under terms of the agreement, EnCana will pay $48/share for Tom Brown, a 24% premium over its closing stock price Wednesday. EnCana has launched a tender offer to purchase all of Tom Brown’s outstanding shares, and if approved by shareholders, the transaction would close by June 1. Tom Brown will become a subsidiary of EnCana under the agreement.

The acquisition, said CEO Gwyn Morgan, is “a hand-in-glove fit with our U.S. Rockies asset base.” He noted that EnCana has forecast a 10%/share average annual growth from its existing assets, “without the need to acquire.” But its strong balance sheet put EnCana “in an advantageous position to build the net asset value of our total portfolio by adding similar, high-quality assets such as Tom Brown.”

Roger Biemans, president of EnCana Oil & Gas (USA) Inc., said that over the past four years, “our U.S. Rockies team has demonstrated success at applying our resource play strategy to build value for our shareholders. Our compound annual growth rate in our U.S. region has been 75%, of which about three-quarters has been through the drill bit. We expect to continue this growth and value creation by developing the Tom Brown assets in Colorado, Wyoming and Texas.”

Since 1998, Tom Brown has grown its production about 18% a year from the Piceance, Green River, Wind River, Paradox, East Texas, Permian and Western Canada Sedimentary basins. Tom Brown has identified an estimated 3,200 drilling locations where EnCana believes it can apply its highly-efficient “gas manufacturing” techniques to grow production and reserves for several years ahead.

Tom Brown already had undergone a review of about 80% of its reserve quantities on a net equivalent basis by Ryder Scott Co., independent petroleum consultants. It already has hedged about half of its 2004 expected gas production and a lesser portion of its volumes through March 2005. However, EnCana said it will increase the hedges up to 100% of forecasted production volumes through 2006.

Of the total acquisition price, approximately $358 million is related to the purchase of undeveloped exploration land, certain midstream assets and Tom Brown’s Sauer Drilling Co. The cost per unit of current proved reserves is estimated at $1.95/Mcf. Full-cycle finding and development costs, including the acquisition cost and all future development costs, are anticipated to be about $1.50/Mcf. Tom Brown’s lease operating expenses in 2003 were 43 cents/Mcf.

EnCana has arranged a $3 billion non-revolving bridge financing with Royal Bank of Canada to fund the acquisition. On a pro forma basis and after the planned acquisition and divestitures, EnCana estimates that its debt-to-total capitalization ratio as of Dec.31, 2003 would have been 40:60.

The boards of directors of both EnCana and Tom Brown have unanimously approved the transaction, and Tom Brown’s board is recommending shareholders accept the offer. A vote will be required only if less than 90% of Tom Brown’s shares are tendered into the EnCana offer. If EnCana is not successful in acquiring the minimum number of shares required, or if Tom Brown is acquired by, or in certain instances enters into an agreement to be acquired by another party, EnCana will receive a cash payment of $80 million from Tom Brown.

Roger Biemans, president of EnCana Oil & Gas (USA) Inc., will be giving a special keynote address at GasMart, NGI’s annual conference, at 1:30 p.m. on Tuesday May 18 in Denver, CO. All sessions and the showcase will be held at the Marriott Denver City Center on California Street. Please see https://www.gasmart.com/ for details or call (703) 318-8848.

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