Estimating its potential Arctic gas reserves at about 68 times greater than its current 13.7 Bcfe of proved and probable reserves, Canada Southern's board of directors said last Thursday that a recent hostile takeover bid by Petro-Canada subsidiary Nosara Holdings Ltd. should be rejected by Canada Southern shareholders because it undervalues the company. The Petro-Canada offer is for a cash price of US$7.50 per share, or about US$113 million.
"We believe Petro-Canada's offer is financially inadequate and fails to recognize the economic and strategic value of Canada Southern's Arctic assets," said Canada Southern Chairman Richard C. McGinity.
"At a time when geopolitical instability in Nigeria, the Middle East, Russia and South America is threatening the supply of oil and natural gas, the Arctic Islands are coming to the fore as a significant, discovered and secure resource with the potential for ready access to key North American markets, including through Petro-Canada's proposed LNG plant at Gros Cacouna, Quebec," he said.
Calgary-based Canada Southern's primary producing assets are located in the Yukon Territory, in northeastern British Columbia and in southern Alberta, but the company also holds about 178,000 gross acres (39,000 net acres) in the Canadian Arctic Islands.
"Canada Southern is an excellent fit with our long-term strategy to build a meaningful resource base in the north and its conventional producing assets can be easily integrated into our Western Canada operations," Kathy Sendall, Petro-Canada's senior vice president of North American natural gas, said earlier this month. "Canada Southern's interests in discovered natural gas resources in the Canadian arctic will further add to Petro-Canada's existing resource position in the Canadian Arctic and in the Mackenzie Delta."
Petro-Canada said the offer price represented a premium of 58% over the closing price of Canada Southern's shares on NASDAQ on May 10 and 45% over the volume weighted average trading price on NASDAQ for the 30 trading days ended May 10. The offer is be conditioned on, among other things, acquiring at least two-thirds of all the company's common shares.
"We have been in discussions with Canada Southern for over a month in an attempt to achieve a transaction supported by Canada Southern's board, but were not able to reach an agreement. Consequently, we have decided to put the offer directly to Canada Southern's shareholders," Sendall said. "We feel this offer is fairly valued for Canada Southern's shareholders and recognizes its inherent worth."
Canada Southern said independent estimates of the discovered natural gas in the Arctic Islands have ranged as high as 19.8 Tcf and the company has an interest in seven of the 16 significant discovery licenses registered with Canada's National Energy Board, including interests in the three largest discoveries in the Drake Point, Hecla and Whitefish areas.
The company's best estimate of the size of its discovered marketable natural gas resource in the Arctic Islands is a net 927 Bcfe. The estimate of Canada Southern's discovered marketable natural gas resource in the Arctic was previously published in the company's 1985 annual report. However, under current Canadian and U.S. disclosure regulations, the company is prohibited from disclosing as proved or probable reserves those resources for which transportation to market is not currently available.
"Unless the rocks have moved, we believe that what was there in 1985 is there today. We are urging shareholders not to tender their shares until the company has explored potential alternative value-maximizing transactions with interested third parties," said McGinity.
Canada Southern also said it believes that Arctic natural gas development will be economically viable. As early as 1980, Petro-Canada and others proposed the Arctic Pilot Project which developed plans to ship Arctic natural gas by LNG tanker to southern markets. This viability was confirmed by the January 2005 Canadian Energy Resource Institute (CERI) report, which favorably assessed several alternative development scenarios for Arctic natural gas.
Canada Southern's board also said it believes that the timing of the offer is "opportunistic and disadvantageous to shareholders" because the offer took advantage of a recent decrease in the trading price of the company's common shares.
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