Marathon Oil’s agreement to acquire Tarragon Oil and Gas Ltd. ofCalgary marks the company’s return to the Canadian E&ampP sectorand illustrates how companies are capitalizing on weakened Canadianequity values.

“It’s part of a trend,” said Verne Johnson, president of ZiffEnergy Group. He said the market hasn’t been as attractive forCanadian E&ampP opportunities since probably 1991. “It’s acombination of the price of oil, particularly, and the stockmarket, which has been for the most part very hard on CanadianE&ampP companies in the last six or eight months. Part of the stockmarket behavior is related to the price of oil, but it certainlypredates the price of oil sliding as much as it has. It startedlast fall, and a big part of that was the Asian meltdown. Oil andgas stocks have never quite come out of that correction as othersectors of the market have, so the Canadian E&ampP companies havesuffered an extended and significant correction and it’s beencompounded by the price of oil.”

Marathon is getting Tarragon for $1.1 billion, including $340million of assumed debt. Marathon has not held oil or gasproperties in Canada since divesting its Canadian holdings in 1982.Properties to be acquired are primarily in Alberta but also BritishColumbia and Saskatchewan. Gas properties are in British Columbiaand throughout Alberta, a spokesman said. “We had positions in mostof the major gas-producing basins of North America, and with theaddition of this we’re now in Canada, too. So we’ve got NorthAmerica pretty well covered as far as gas,” said spokesman WilliamRyder. Marathon has had a business development office in Calgaryfor the last two years, he said.

“Tarragon provides us with a very strategic fit in our growthstrategy and will enable us to establish a strategic platform forfuture growth in one of North America’s most attractive gasbasins,” said Thomas J. Usher, CEO of Marathon parent USX Corp. “Wehave increased our worldwide reserves by 20%, and the largeundeveloped leasehold position we are acquiring provides Marathonmultiple opportunities for growth in Canada.” He noted that whilethere could be minimal dilution of earnings in 1998, the impact in1999 should be accretive to earnings per share. The impact shouldbe positive on cash flow per share in both years.

Shareholders of Tarragon will receive C$14.25 for each Tarragonshare or, at their option, equivalent value in exchangeable sharesof a wholly-owned Canadian subsidiary of Marathon. Such shareswould be exchangeable into USX-Marathon Group common stock. No morethan 90% of the consideration is to be in exchangeable sharesunless consented to by Marathon. If the transaction is notcompleted, Marathon could be paid a fee of C$30 million.

In April, Tarragon acquired most of the Canadian assets ofUnocal Corp. for C$308 million in a deal that gave Unocal 27% ofTarragon shares, a C$100 million debenture and three seats onTarragon’s board. Like other Canadian oil and gas producers,Tarragon has suffered in an environment of low crude oil prices.First-quarter net earnings were C$450,000, down 95% from the sameperiod a year earlier.

Johnson said he was a little surprised by the Marathon deal asTarragon had only just acquired the Unocal assets. “Everybody’s gota price, and if you hit the button everything can change hands,Unocal included. It is theoretically possible that somebody elsecould come in and make a better offer, and that could includeUnocal.”

Another driver for interest in Canadian properties is pipelineprojects proposed to move Canadian gas into the United States,Johnson said. “I think that’s a business factor that’s a part ofthe analysis that acquirers are making, the belief that increasedtakeaway should improve, certainly for natural gas, the producingeconomics, propitious. The conventional wisdom is there’s lots ofgas and increased pipelines will improve access to the Americanmarket, reduce basis and improve wellhead prices in Canada. It’snot entirely certain, and there’s some serious study that needs tobe done.” Johnson said Ziff will have the first part of a report onthe subject available to clients in September.

How much longer will Canadian E&ampP companies remainattractive? “It’s got a hell of a lot to do with equity prices, andthat’s got something to do with the price of oil. they’re related.The window should remain open for a good part of this year. Theprice of deals is also influenced by competition, who else is goingto bid what.” He said he had several companies in mind as potentialacquirers and others as potential targets but declined to givenames.

Joe Fisher, Houston

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