Conoco Adds Gas Assets in Gulf Canada Deal

After looking at what Conoco CEO Archie Dunham said were more than 80 properties in the last two years, the fourth largest major announced last week that it would buy Gulf Canada Resources Ltd. in a cash deal worth $4.3 billion (C$6.7 billion). The deal would push Conoco's worldwide reserves almost 40% to 3.7 Bboe, adding Gulf Canada's assets in North America, Indonesia, the Netherlands and Ecuador.

Conoco's acquisition is also expected to increase the muscle of a group of major energy producers pushing to build a natural gas pipeline to tap Canada's Arctic reserves, Dunham said last week. Gulf Canada is one of four companies working on an application for a pipeline from the Mackenzie Delta region, and Gulf Canada CEO Dick Auchinleck has been a strong promoter of the deal (see NGI, Nov. 8, 1999).

Gulf Canada's partners in the estimated $3 billion pipeline deal are Imperial Oil Ltd., Shell Canada Ltd. and Exxon Mobil Corp. The companies continue to hold a license from the National Energy Board to export the estimated 13 Tcf of Mackenzie Delta-Beaufort Sea region gas.

In North America alone, Conoco's acquisition ups its natural gas production and proved reserves by 50%, to 1.4 Bcf/d and 4.1 Tcf net. Its pro forma North American liquids production, in crude oil, syncrude and natural gas liquids would more than double, and its proved North American liquids reserves would more than triple with the transaction. Conoco also would gain significant production and strategic positioning in three of the premier natural gas basins in North America: Western Canadian Sedimentary Basin, the San Juan Basin and the South Texas Lobo Trend.

Longer term, Gulf Canada's four million acres of undeveloped land in Western Canada and its position in the Mackenzie Delta would assist Conoco with its ongoing North American natural gas development program.

Dunham called Gulf Canada "a very different company" than it was two years ago because, he said, the company has increased its natural gas assets and strengthened its balance sheet.

"Gulf Canada's significant Canadian operations are a great fit with our current operations and consistent with our strategic direction," Dunham said. "Over the past two years, we have acquired interests in natural gas producing and processing properties in Canada. The management of Gulf Canada has greatly strengthened their operating portfolio and balance sheet during the last few years, and we consider the Gulf Canada management team and employees a major asset in this transaction."

Both boards have already approved the acquisition, expected to close in the third quarter. The Conoco offer is a 34% premium to Gulf Canada's closing price last Monday, equaling $8.02 in cash for each share. Conoco also would assume about $2 billion in debt, preferred stock and minority interests. If it doesn't go through with the deal, Gulf Canada would pay a breakup fee of C$220 million.

Conoco, headquartered in Houston, would maintain the combined company's Canadian headquarters in Calgary, and added that "any workforce impact" would be accomplished through attrition and reduced hiring. In the transition period, Auchinleck will manage the combined Canadian company and would maintain his current position on the board of Gulf Indonesia Resources Ltd.

In the first quarter, Gulf Canada reported earnings of $140 million, a near match for all of its 2000 earnings, which were $148 million. Auchinleck attributed the climb to a "successful winter drilling season in Western Canada" and its acquisition of Crestar. Its first quarter drilling success rate was 83%, and 13,300 boe/d were added to daily production by the end of March: 51.3 MMcf/d and 4,800 bbl/d of liquids.

J.P. Morgan analyst Jay Wilson called the acquisition "a great strategic fit at a very attractive price," and he raised Conoco's price target to $36 from $32. He also raised earnings per share for 2001 to $3.03 and those in 2002 to $2.38, up from $3.00 and $2.25. He expects the acquisition to add 1% to Conoco's earnings this year, and 6% in 2002.

Dain Rauscher Wessels also touted what it called an "excellent strategic acquisition" for Conoco. "Besides the strategic rationale. We believe the deal also makes sound financial sense. Based on our preliminary evaluation of the deal, the acquisition will be immediately accretive to Conoco's earnings. We forecast Conoco's pro forma EPS to increase by approximately 3% and 5% in 2001 and 2002, respectively. Cash flow, coupled with reduced capital spending and dispositions, should enable Conoco to rapidly reduce a significant portion of the acquisition-related debt."

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