In joint releases Friday morning, Canadian heavyweights PanCanadian Energy Corp. and Alberta Energy Co.(AEC) — the fourth and fifth largest energy companies in the country — announced they are talking about a possible merger. If completed, the company would become one of the largest natural gas producers in North America. Based on Thursday’s closing on The Toronto Stock Exchange, the companies had a market value of C$19.4 billion ($12.1 billion).

Both companies have seen their stocks rise in recent days because of merger rumors. Shares of PanCanadian rose almost 9% on Thursday to close at C$41.84, gaining C$3.41 ($2.13). Likewise, AEC rose almost 5% Thursday to stand at C$59 after gaining C$2.70. A merger of the equals would put the new company in second place revenue-wise in Canada, ahead of Petro-Canada and behind Imperial Oil Ltd., which is 70% owned by Exxon Mobil Corp.

PanCanadian had been 86% owned by Canadian Pacific Ltd. until late last year, when CP completed the spinoff of the unit. The spinoff put PanCanadian into the top five of North American exploration companies, and also put it in a position to consider “major acquisitions,” company officials said at the time.

Natural gas has been PanCanadian’s focus, with a proven reserve base of 1,043 MMboe — 59% in gas. It also holds a huge land base in the Western Canadian Sedimentary Basin. PanCanadian also said last year that it plans to grow along the East Coast of Canada in the Sable Island region, as well as the Gulf of Mexico and the North Sea. Despite cutting its overall capital spending budget for exploration and production programs this year by 13% to $1.67 billion, PanCanadian said last week (before merger talks were announced) it would maintain its spending levels on natural gas E&P and still expects a 10% increase in North American gas production over 2001 levels.

Management believes the E&P spending program will provide for the drilling of 1,800 wells this year compared with 2,150 wells during 2001. About 70% of its total budget will be allocated to its natural gas program.

“The company remains focused on two key strategic thrusts — North American natural gas and international oil,” said PanCanadian President Michael A. Grandin. “With this level of investment, we expect to grow our North American natural gas production by 10% in 2002. We also expect to add more than 200 million boe, thus growing our proven reserves by about 10% — despite the shift in expenditures from the Western Basin to major projects in the East Coast offshore, the United Kingdom Central North Sea, and the deepwater Gulf of Mexico.”

Planned capital expenditures for the year are the second highest in the company’s history. The company expects to be able to fund its program largely from cash flow. Approximately $1.1 billion, or 70% of PanCanadian’s exploration and production capital investment will be targeted towards natural gas. Over the past five years, PanCanadian has grown its gas production at a compound annual rate of approximately 9%.

In response to wide light-heavy oil price differentials in 2001, the company is curtailing its heavy oil-directed expenditures from $212 million in 2001 to $76 million. Oil production is expected to decline by 5% year over year, given natural declines, the company’s strategic focus on gas and decision to reduce expenditures on conventional heavy oil in response to the lower crude prices and wider differentials.

About $430 million in 2002 will be directed towards exploration and development prospects in the Gulf of Mexico, the United Kingdom and Canada’s East Coast offshore region, where its massive Deep Panuke project is expected to result in a doubling of gas flows to the U.S. Northeast in the next few years. Planned 2002 development expenditures for Deep Panuke, offshore Nova Scotia, are $114 million.

“The year 2002 will be a very active one for PanCanadian outside of the Western Basin, as we commence the development phases at Buzzard, Deep Panuke and Llano,” Grandin said.

At Deep Panuke, PanCanadian estimates recoverable reserves of up to 1 Tcf of natural gas and is currently preparing a development plan application. At the Llano oil field in the Gulf of Mexico, co-venturers aim to complete the initial development-concept selection phase of work in the first half of 2002, which could lead to first production in early 2004.

Out of the total 1,800 wells the company plans to drill this year, 1,500 are expected to be drilled in the Western Basin. The company expects to drill only 15 wells in the Canadian East Coast offshore and internationally.

“Preliminary results for 2001 indicate that we have replaced approximately 170% of production, on an established basis,” Grandin added.

Last December, AEC announced it expected a total gross capital investment of approximately C$2.1 billion in 2002, while divesting at least C$400 million in non-core assets, resulting in net capital investment of C$1.7 billion next year. AEC also said last year that it was anticipating a similar range of capital investment, internally funded in 2003 and 2004, to achieve its production growth targets (see Daily GPI, Dec. 18, 2001).

Daily natural gas sales for AEC this year re expected to average between 1.525-to-1.575 Bcf, up about 15% per share from 2001. Oil production is forecast to be between 142,000-153,000 b/d, up about 8% per share. AEC said it planned to spend C$290 million for exploration activities in the company’s three growth platforms, Western Canada, the U.S. Rockies and Ecuador, and another C$205 million in new ventures in the Gulf of Mexico, the Mackenzie Delta, Alaska and overseas.

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