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Canadian E&P Companies Are Becoming Attractive Buys

Canadian E&P Companies Are Becoming Attractive Buys

Marathon Oil's agreement to acquire Tarragon Oil and Gas Ltd. of Calgary marks the company's return to the Canadian E&ampP sector and illustrates how companies are capitalizing on weakened Canadian equity values.

"It's part of a trend," said Verne Johnson, president of Ziff Energy Group. He said the market hasn't been as attractive for Canadian E&ampP opportunities since probably 1991. "It's a combination of the price of oil, particularly, and the stock market, which has been for the most part very hard on Canadian E&ampP companies in the last six or eight months. Part of the stock market behavior is related to the price of oil, but it certainly predates the price of oil sliding as much as it has. It started last fall, and a big part of that was the Asian meltdown. Oil and gas stocks have never quite come out of that correction as other sectors of the market have, so the Canadian E&ampP companies have suffered an extended and significant correction and it's been compounded by the price of oil."

Marathon is getting Tarragon for $1.1 billion, including $340 million of assumed debt. Marathon has not held oil or gas properties in Canada since divesting its Canadian holdings in 1982. Properties to be acquired are primarily in Alberta but also British Columbia and Saskatchewan. Gas properties are in British Columbia and throughout Alberta, a spokesman said. "We had positions in most of the major gas-producing basins of North America, and with the addition of this we're now in Canada, too. So we've got North America pretty well covered as far as gas," said spokesman William Ryder. Marathon has had a business development office in Calgary for the last two years, he said.

"Tarragon provides us with a very strategic fit in our growth strategy and will enable us to establish a strategic platform for future growth in one of North America's most attractive gas basins," said Thomas J. Usher, CEO of Marathon parent USX Corp. "We have increased our worldwide reserves by 20%, and the large undeveloped leasehold position we are acquiring provides Marathon multiple opportunities for growth in Canada." He noted that while there could be minimal dilution of earnings in 1998, the impact in 1999 should be accretive to earnings per share. The impact should be positive on cash flow per share in both years.

Shareholders of Tarragon will receive C$14.25 for each Tarragon share or, at their option, equivalent value in exchangeable shares of a wholly-owned Canadian subsidiary of Marathon. Such shares would be exchangeable into USX-Marathon Group common stock. No more than 90% of the consideration is to be in exchangeable shares unless consented to by Marathon. If the transaction is not completed, Marathon could be paid a fee of C$30 million.

In April, Tarragon acquired most of the Canadian assets of Unocal Corp. for C$308 million in a deal that gave Unocal 27% of Tarragon shares, a C$100 million debenture and three seats on Tarragon's board. Like other Canadian oil and gas producers, Tarragon has suffered in an environment of low crude oil prices. First-quarter net earnings were C$450,000, down 95% from the same period a year earlier.

Johnson said he was a little surprised by the Marathon deal as Tarragon had only just acquired the Unocal assets. "Everybody's got a price, and if you hit the button everything can change hands, Unocal included. It is theoretically possible that somebody else could come in and make a better offer, and that could include Unocal."

Another driver for interest in Canadian properties is pipeline projects proposed to move Canadian gas into the United States, Johnson said. "I think that's a business factor that's a part of the analysis that acquirers are making, the belief that increased takeaway should improve, certainly for natural gas, the producing economics, propitious. The conventional wisdom is there's lots of gas and increased pipelines will improve access to the American market, reduce basis and improve wellhead prices in Canada. It's not entirely certain, and there's some serious study that needs to be done." Johnson said Ziff will have the first part of a report on the subject available to clients in September.

How much longer will Canadian E&ampP companies remain attractive? "It's got a hell of a lot to do with equity prices, and that's got something to do with the price of oil. they're related. The window should remain open for a good part of this year. The price of deals is also influenced by competition, who else is going to bid what." He said he had several companies in mind as potential acquirers and others as potential targets but declined to give names.

Joe Fisher, Houston

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