Following up on the merger announcement made earlier this year between Calgary-based PanCanadian Energy Corp. and its neighbor Alberta Energy Co. (AEC), analyst groups have been divided on expectations for the merger’s future following reports of decreased earnings and production declines from both companies for the fourth quarter 2001.

Despite a 74% drop in net income in the fourth quarter, Calgary-based PanCanadian Energy Corp. said it had the strongest annual financial results in its history because of higher natural gas prices earlier in the year, increased gas production and favorable price hedges (see Daily GPI, Feb. 21). Due to lagging gas prices, AEC experienced a drop in earnings during 4Q 2001, falling 83% from the fourth quarter of 2000 to C$80 million (C$0.46 per share diluted).

In late January, PanCanadian and AEC announced that they intended to create the largest independent natural gas producer in North America (see Daily GPI, Jan. 28; Jan.29 ). EnCana Corp. would have an enterprise value of more than C$27 billion, with the largest proved reserve base in the world (7.8 Tcf of gas and 1.3 billion bbl of oil), equalling 2.6 billion Boe. In North America alone, the companies forecast 2.7 Bcf/d of production for 2002.

The companies would bring to the table more than C$2 billion in combined North American midstream and marketing assets, including energy services, gas storage, natural gas liquids extraction, pipelines and power generation. PanCanadian said the merger will lead to C$250 million in annual operating and administrative cost synergies and C$250 million in improved capital allocation. The transaction is expected to close in early April 2002.

The full year and fourth quarter 2001 results of PanCanadian and AEC have some analysts optimistic about the pending EnCana deal, while others aren’t so sure. UBS Warburg said that assuming the transaction proceeds, it believes the combined company will receive a significant positive re-rating for the following reasons:

“If approved, the combination of these two companies will create a new entity with an approximate EV of $28 billion — bigger even than Anardarko Petroleum, the largest US Independent, and about 2.5 times the EV of the next largest Canadian E&P company,” UBS Warburg said.

However, analysts with Lehman Brothers said that weak production showings from PanCanadian and AEC during the fourth could spell trouble.

“The fourth quarter oil and natural gas volume shortfall of 5% by PanCanadian and 11% by Alberta Energy supports our thesis that the proposed EnCana could disappoint on what is now a 7%-12% total volume growth target this year (up from 4%-9% due to lower than expected ’01 results), especially given that its ’02 capex budget is C$0.8-C$1.1B greater than our cash flow estimate on a January pro-forma basis,” Lehman Brothers said in an Equity Research report.

The group said the fourth quarter production miss also makes the previously stated 2002-2005 production growth target of 50%-55% for EnCana seem “even more aggressive.”

“As a result, we see downside risk to the shares of Alberta Energy and PanCanadian, and maintain our 3-Market Perform Rating on both stocks, Lehman Brothers said.

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