PanCanadian, AEC Merger Creates Top North American Independent
Alberta Energy Co. Ltd. (AEC) and PanCanadian Energy Corp. have agreed as expected to merge their Canadian-based operations, which will create the largest independent natural gas producer in North America. To be called EnCana Corp., the super-independent would have an enterprise value of more than C$27 billion, with the largest proved reserve base in the world, with 7.8 Tcf and 1.3 billion bbl, equalling 2.6 billion boe.
In North America alone, the companies forecast 2.7 Bcf/d for 2002, and 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.
Worldwide, EnCana's daily production targets this year will be 2.7 Bcf and 255,000 bbl and liquids, equalling 700,000 boe, with a capital investment program of C$3.8 billion. By 2005, it expects to have targeted daily production of 1.1 million boe, which would be a 55% increase over this year. The companies expect to close the deal by mid-April.
Its North American base would be superior as both the largest independent natural gas storage network, and with an unparalleled land base in Canada's Western Basin and East Coast Scotian Shelf. It also would have one of North America's largest drilling programs, with more than 2,800 exploration and development wells planned for 2002. In addition it would become a major developer of oil sands production in Canada, with a significant interest in Syncrude and two thermal recovery projects at Foster Creek and Christina Lake.
Its six core growth platforms would include the Western Canadian Sedimentary Basin (natural gas and oil); offshore East Coast Canada (gas); the U.S. Rocky Mountains (gas); the Gulf of Mexico (oil); the U.K. Central North Sea (oil); and the Oriente Basin of Ecuador (oil). It will have additional potential from high-impact exploration in the Canadian North, Alaska, Australia, Azerbaijan, the Middle East and Brazil, with more than 13 million net acres of prospective undeveloped land.
"This transaction creates a leading global super-independent energy company, headquartered in Canada. We have decided to come together as equals from positions of strength, so that we can achieve a stronger future in this highly competitive marketplace," said David O'Brien, who will serve as EnCana's non-executive chairman. O'Brien is currently PanCanadian's chairman and CEO. "AEC brings unparalleled near-term and medium-term internal growth from North America and Ecuador, while PanCanadian brings near-term growth in Western Canada and prospects for very strong long-term growth from Eastern Canada and the North Sea."
Gwyn Morgan, currently AEC's president and CEO, will hold the same positions in EnCana. "Our strong balance sheet will enable us to both optimize our capital investment program through the drill bit and to pursue selective acquisitions," he said. "We will have the size and technical capabilities to manage the challenges associated with developing high-impact North American and offshore projects. I am extremely confident that we can manage our combined assets and resources to create more profitable growth and higher shareholder returns than either company could achieve on a stand-alone basis."
Under the terms of the agreement, AEC common shareholders would receive 1.472 common shares of PanCanadian for each common share of AEC they own. The exchange ratio is a market-to-market ratio based on the average of the closing price for the 10 trading days ended January 23, 2002. On completion of the proposed transaction, PanCanadian shareholders would own approximately 54% and AEC shareholders would own approximately 46% of EnCana. Both boards of directors have endorsed the transaction and have received fairness opinions from their financial advisers.
The proposed merger is subject to approvals by the shareholders of both companies, the Court of Queen's Bench of Alberta, and appropriate regulatory and other authorities. The companies said the name "EnCana" will identify the company's business of providing energy supplies for people, and its Canadian heritage and headquarters.
The merging companies estimate achieving annual pre-tax cost savings of close to C$25 million that will come from gaining efficiencies in overlapping operations, streamlining business practices, improving procurement practices, building a common information technology base and incorporating best practices. The companies expect to achieve this annual rate of synergies within 12 months after completion of the integration. The companies also expect to achieve annual capital program synergies of an additional C$25 million.
EnCana is anticipated to have one of the strongest balance sheets among its peer group, providing significant financial flexibility as evidenced by pro forma debt to capitalization of 34%. Shareholders are expected to enjoy enhanced trading liquidity and strong returns on capital employed. The pro forma financial impact on cash flow per share, including the annual synergies, is expected to be accretive to PanCanadian and neutral to AEC. The impact on earnings per share is anticipated to be neutral to PanCanadian and accretive to AEC.
"Both AEC and PanCanadian have successfully and decisively integrated companies with great people and assets and realized the potential of those acquisitions," said Morgan. "This is a different deal -- a merger of equals -- but we both bring a passion and discipline to outperform and to create value. I look forward to leading and working with a highly talented and committed team."
Recognizing that AEC's annual dividend would normally be payable after the expected closing date of the transaction, AEC's board declared a dividend of C$0.45 per share payable on March 28, 2002 to AEC shareholders of record on March 7, 2002.
Lehman Brothers analyst Thomas Driscoll estimated that total production on a boe basis, net of royalties, in 2002 will be about 220-225 MMboe -- 12-14% higher than Lehman's production estimate for current leading North American independent Anadarko Petroleum Corp.
Driscoll said, "the combined company may have a challenge in growing organically because of its size," but will benefit from "locked in mid- and long-term production growth provided by large discoveries made by PanCanadian offshore East Coast Canada (Deep Panuke), deepwater U.S. Gulf of Mexico (Llano) and the U.K. North Sea (Buzzard), as well as from the high-quality near-, mid- and long-term growth projects that Alberta Energy provides." Driscoll said PanCanadian's "large fee land asset base...should help enhance profitability of the combined entity," with "production levered about 64% toward North American natural gas."