Burlington, Poco Turn Industry Eyes To Canadian E&P
With its deal to acquire Poco Petroleums for $2.5 billion, Burlington
Resources could be leading a charge of U.S. E&P companies heading to
Canada for relatively cheap gas assets at a time when Canada is expected
to play a large role in meeting strong gas demand growth.
The acquisition of Calgary-based Poco Petroleums Ltd. of Calgary would
give Houston-based Burlington Resources Inc. (BR) a Canadian presence,
add 500 MMcf/d of gas production and make the gas-focused company the third
largest holder of gas reserves in North America. BR already ranks first
among U.S. independent producers in terms of proved U.S. reserves.
The deal is viewed positively by industry analysts who see no duplication
of assets and the expectation of good things to come from Poco's assets
now that they will be backed by Burlington's financial clout. "Certainly
the reception of Burlington wherever they presented [the deal] over the
last week has been exceptional," an analyst said. "They did a
lunch in Toronto that was extremely well attended and very well received.
A lot of people in Toronto, that's the first time they've ever seen Burlington."
The deal was announced late Monday. Tuesday investors set upon Canadian
gas stocks. Poco's shares rose by C$1.80 (16.09%) to C$15.20 on the Toronto
Stock Exchange. Anderson Exploration, another big-name Canadian gas producer
that is often compared to Poco, was the exchange's second most actively
traded stock, rising C$2 to reach a new high for the year of $22.
Martin Molyneaux, an oil and gas analyst with FirstEnergy Capital Corp.
in Calgary, said Burlington has effectively re-priced Canadian gas reserves
with the Poco deal. He said the deal pegs Poco's proven reserves at C$1.45/Mcf
for a premium as high as 38% when compared to other recent deals. "Whatever
way you look at it you've re-priced Canadian natural gas reserves in the
ground by something around 20%," Molyneaux said. Noting that he and
FirstEnergy are bullish on the future for gas, Molyneaux said Burlington
got a good deal.
Molyneaux also said Canadian companies are still comparatively cheaper
than their American counterparts, and most of the Canadian companies have
higher growth rates. In other words, copycat transactions "wouldn't
surprise me a whole lot. If you can use a premium priced U.S. dollar versus
a Canadian dollar, Canada looks cheap.
"Anybody who is of any real size in the gas business has to think
across the border." Off the top of his head, Molyneaux named Anadarko,
Apache and Coastal.
"More than a year ago, we identified the western Canadian sedimentary
basin as an excellent growth opportunity for BR," Burlington CEO Bobby
Shackouls said during a conference call. "The basin is relatively
immature with an excellent resource potential, one of the few such basins
left in North America. We then began an extensive screening process looking
for companies and/or asset packages that had the following characteristics:
A natural gas focus, a strong underlying resource base, access to frontier
areas, control of existing infrastructure, critical mass and a strong management
and technical team. Obviously we preferred a negotiated transaction. We
believe that the Poco transaction meets all of these criteria. This step
- and let me assure you it is merely one step among many we intend to take
- fits perfectly with our strategy and provides us an engine for future
Such a lengthy and extensive hunt for Canadian assets was earning Burlington
a reputation as a shopper and not a buyer, Molyneaux said.
During the conference call with Shackouls, Poco CEO Craig W. Stewart
came just short of saying "I told you so" when telling the Poco
gas story. "We have preferred natural gas when others did not. Prices
were depressed, differentials were wide, and the infrastructure was under
development. But we foresaw a bright future for North American natural
gas. And today we're seeing our expectations on the natural gas story coming
to fruition, and at a time when our opportunity set is broader and deeper
than ever. In this environment we could have certainly continued to successfully
pursue our growth strategy as an independent entity, but we saw a greater
opportunity for our shareholders through the merger with BR."
The combined Burlington-Poco would be the fourth-largest gas producer
in North America and the largest among independent E&P companies. Combined
worldwide reserves were 9.9 Tcfe as of Dec. 31. Combined 1998 worldwide
gas production was 2.1 Bcf/d; oil production was about 106 thousand barrels/d;
the total net worldwide acreage position was 21.4 million acres, with 3.6
million acres in Canada; and operating cash flow was about US$1.1 billion
(C$1.6 billion). On Monday, combined equity market capitalization was about
US$9.9 billion (C$14.6 billion).
"The addition of Poco's 3.1 million acres of undeveloped leasehold
to our quality fee mineral and acreage positions will significantly enhance
our inventory of high-potential exploration inventory," said Shackouls.
"The combined company will be financially strong, with long-term debt
comprising approximately 42% of the book capitalization of the company.
BR, with Poco as its partner in Canada, will be better positioned than
at any time in its history to continue the implementation of our aggressive,
global, value-oriented capital program."
Most of Burlington's production came out of the San Juan Basin of New
Mexico. It also has operations in the Midcontinent, including the Rocky
Mountains, the deep-water Gulf of Mexico, the East Irish Sea, the North
Sea, North Africa and Latin America. Its 2Q99 net income was $15 million,
down from $23 million. Still, the results were an improvement over the
previous two quarters, noted Shackouls.
Shackouls said BR currently has no assets north of the U.S.-Canadian
border and that there is virtually no overlap between the two companies'
operations. It is expected that nearly all employees of Poco will become
part of the combined enterprise, which will continue to have a major presence
Poco pursues high-impact, deep gas exploration in its northern region
and liquids-rich gas in its western region. The smaller eastern region
is in harvest mode. Poco, which is Canada's ninth largest gas producer
with 1998 average production of 490 MMcf/d, last month made a deal with
Chevron in which it secured 50% ownership of its pick of prospects from
400,000 Chevron acres (see NGI July 26).
Earlier this month, Poco announced results for the first half of 1999
that included higher volumes for gas-related production and a major reduction
in finding and development costs. Gas production increased 6% over the
first half 1998 to 502.2 MMcf/d, while gas liquids production rose 17%
to 22,457 barrels/d. Daily crude oil production declined 22% to 16,352
barrels/d due to Poco's strategic shift away from oil drilling and the
sale of crude oil properties in 1998.
"Poco recognized a number of years ago that the traditional discount
that Canadian gas was trading for relative to prices in the United States
would disappear," Stewart said at the time. "We also believed
strongly that prices would rise in North America as a whole, and positioned
our production base towards natural gas. Importantly, we also invested
heavily in land and seismic, allowing us to pursue a large ongoing natural
gas-directed exploration program. By joining forces with Burlington Resources,
the preeminent 'super-independent' E&P company, we will become a major
part of a combined enterprise with the size and scope, operating skills
and financial resources to more aggressively pursue the growth opportunities
we have both identified in Canada, the United States and around the globe."
Burlington shares closed down Tuesday $2.56/share at $42.75/share, a
5.66% decrease as analysts fretted that Burlington is paying too much for
Poco shareholders will receive BR common equivalent shares (exchangeable
shares) based on a fixed exchange ratio of 0.250 exchangeable shares for
each Poco share held. Based on BR's closing stock price on Monday the exchange
ratio represents an implied price of about C$16.78 (US$11.33) per Poco
share. Given the assumption by BR of about US$750 million (C$1.1 billion)
of Poco debt, the transaction has a total value of about US$2.5 billion
(C$3.7 billion). The agreement was unanimously approved by the boards of
The transaction is expected to be accounted for as a pooling of interests
and to qualify as a tax-free reorganization. It is anticipated that, excluding
the impact of any one-time transaction charges, the deal will be immediately
accretive to earnings, cash flow and net asset value per share in 1999
and beyond. Deal completion is expected by year-end.
Joe Fisher, Houston