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Canada Properties Hot Among Canadians, Americans, Too

Canada Properties Hot Among Canadians, Americans, Too

Robust acquisition of Canadian properties continued last week with the announcement that Canadian producer Renaissance Energy will acquire fellow Canadian Pinnacle Resources Ltd. in a deal Renaissance CEO Clayton Woitas said "expands and strengthens our existing holdings and offers improved operating efficiencies.

"We have indicated for some time that we would pursue appropriate acquisitions that reflect our counter-cyclical strategy and will create value for shareholders. We have maintained an ongoing review of prospective candidates, including Pinnacle. That preparation enabled us to respond quickly to this unique opportunity. We are the obvious buyer given the similarity of assets, operations and culture.

"We are acquiring a high quality portfolio that we know well; one that complements our own business; is located where we are or want to be; and can generate value for our shareholders."

Pinnacle shareholders will receive 0.66 of a Renaissance share for each Pinnacle share. The exchange ratio represents an offer price of $16.76 per Pinnacle share, which is a 28% premium based upon the closing prices of the companies' shares on the Toronto Stock Exchange June 5. Renaissance will assume Pinnacle's outstanding debt of about $380 million resulting in a total transaction value of $1.06 billion if all Pinnacle's shares are tendered. The offer for all common shares has the approval of the boards of both companies.

Pinnacle CEO Matthew Brister said, "Renaissance is a proven performer with a strong focus on growth, profitability and shareholder value. We are delighted that our shareholders and employees will be able to participate in this unique opportunity going forward." The deal's valuation works out to about $6.79 per barrel of oil equivalent (Boe) of proven reserves as of Dec. 31.

"We see tremendous upside in three key areas of Pinnacle's asset base," Woitas said. He pointed to overlapping oil-related assets in southwest Saskatchewan and "unrecognized natural gas potential in this region. Second, we see great opportunities in Pinnacle's Ansell and McLeod areas, which have been the focus of Pinnacle's future natural gas growth." The two companies also have adjacent operations in the Athabasca North region "where continued growth in natural gas reserves and production will be pursued and additional operating efficiencies are expected."

Earlier this month, Marathon Oil agreed to acquire Tarragon Oil and Gas Ltd. of Calgary, marking the company's return to the Canadian E&ampP sector and illustrating how companies are capitalizing on weakened Canadian equity values.

"It's part of a trend," said Verne Johnson, president of Ziff Energy Group (See NGI June 8). He said the market hasn't been as attractive for Canadian E&ampP opportunities since probably 1991. "It's a combination of the price of oil, particularly, and the stock market, which has been for the most part very hard on Canadian E&ampP companies in the last six or eight months. Part of the stock market behavior is related to the price of oil, but it certainly predates the price of oil sliding as much as it has. It started last fall, and a big part of that was the Asian meltdown. Oil and gas stocks have never quite come out of that correction as other sectors of the market have, so the Canadian E&ampP companies have suffered an extended and significant correction and it's been compounded by the price of oil."

Other recent Canadian deals are Dominion Energy's April purchase of Archer Resources Ltd., a publicly traded gas exploration and production company headquartered in Calgary; and Union Pacific Resources Group's March acquisition of Norcen Energy Resources.

Peter Linder, senior oil and gas analyst with CIBC Wood Gundy in Calgary, said the spate of Canadian acquisitions is a healthy process. "I'd like to see more Americans coming in here. I think they're very welcome, and I think we'll be a lot better industry going forward with this process."

He said he expects the trend to continue through this year and perhaps longer. "From my perspective there's really no difference buying a Canadian producer than a U.S. producer. The advantage is that the Canadian producers' assets are much cheaper than the equivalent assets of the U.S. producer, plus the added advantage of a very low Canadian dollar value.

"We have a lot of Canadian producers - I'm sure there are a lot of U.S. producers as well - that have got themselves into trouble from the combination of buying properties in 1996 and 1997 at inflated prices and have reached debt levels that are very unhealthy and are unable to raise money from the equity market. And basically they've hit the wall. There's no future. They can't proceed. They're stuck."

Joe Fisher, Houston

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