In a deal that is being called the biggest in the Canadianenergy industry this year, two Calgary companies, Husky Oil Ltd.and Renaissance Energy Ltd., agreed last week to merge into HuskyEnergy, a move that will catapult the new company into the top tierof Canada’s publicly traded energy firms.

The total value of the deal is estimated at C$4.4 billion.

Poised to become Canada’s second largest oil and natural gasproducer, Husky Energy also will hold the title of Canada’s fourthlargest energy company overall after Imperial Oil Ltd., ShellCanada Ltd. and Petro-Canada, producing about 252,000 boe/d withreserves of more than 1.43 billion boe, converting gas to oil on a10-to-1 basis. Analysts say if first-quarter results areannualized, the merger in 2000 will result in estimated annualrevenues of more than C$5 billion, earnings of more than C$485million, and cash flow of C$1.55 billion.

The newly formed Husky Energy would have a stock market value ofC$7.2 billion, and become one of the top Canadian heavy oil, oilsands and East Coast offshore operators. Under terms of what isconsidered a friendly offer, Renaissance shareholders may choose totake C$18 cash per share in the new company – up to C$500 million -or trade share-for-share in the new company, Husky Energy.

Renaissance shareholders also would receive a special return ofcapital of C$2.50 per share in the merger. Based on an estimatedtotal value of C$19.40 a Renaissance share, the offer represents a28% increase over the average market price in the past two weeks.Husky Energy also would assume Renaissance’s C$1.4 billion debt.

“This is a win-win for both companies and a major step inrealizing future growth potential,” said Husky’s current and futureCEO John Lau, who has led the company since 1993. “We have highregard for Renaissance, its achievements and its people.”

Renaissance, which at one time had been a darling of theCanadian energy companies and is still one of the leading oil andgas producers in the country, has been struggling for about threeyears now because of high production costs. The company has longhad a reputation for buying up huge tracts of land in westernCanada and then drilling wells quickly to keep its productiongrowing.

However, Renaissance’s high-risk method of exploration andproduction began to backfire in 1997, and the company began to losevalue and a lot of its glamour. Earlier this year, Clayton Woitas,Renaissance’s longtime CEO, resigned, and the company has sincebeen looking for a new direction.

Irwin Michael, a Toronto portfolio manager with ABC Funds, whichholds Renaissance shares, called Renaissance a “sitting duck”waiting to be taken over. Following the news Monday, Renaissanceshares climbed C$0.45 to C$17.05, following a jump last Friday ofC$1.70 amid merger rumors.

Currently a closely held private oil and gas producer, Husky’smajor shareholders include Hong Kong billionaire Li Ka-Shing andhis company, Hutchison Whampoa Ltd. For several years, Huskyofficials had indicated they wanted to go public again after beingtaken private nearly 20 years ago. Currently, Husky is 49% owned byLi’s company, while Li and his family directly own another 46%, andthe Canadian Imperial Bank of Commerce owns the remaining 5%.

In 1999, nearly 50% of Husky’s operating profit was generated byits upstream operations, which include the exploration, developmentand production of crude oil, natural gas and NGLs. The company’supstream operations are mostly located in western Canada andoffshore the east coast of Canada.

Lau said last week that he expects the Hong Kong shareholders tokeep their stakes in the company. In fact, Lau said theydemonstrated their confidence in the merger by raising their stakein the new Husky Energy to 71.5% after the companies agreed to a65-35% Husky Oil-Renaissance split. Lau also does not anticipatemajor asset sales when the deal is finalized. “From our point ofview, all the assets are complementary to each other,” he said.

Meanwhile, Renaissance Chairman Ron Greene, who would become adirector in Husky Energy, said some of the combined new company’s1,800 employees may lose their jobs. Husky now has about 1,000employees while Renaissance has 800. “There will be someduplication, obviously, but we think it will be minimal,” Greenesaid. “We do not want to have the implication that we’re out to cutcosts by cutting employees. That’s not our business plan here.”

Greene said the transition would be invaluable to currentRenaissance shareholders because the merger would move the companyinto “several new medium and long-term upstream operating areas aswell as midstream/downstream activities.” Shareholders are expectedto vote on the merger at the end of August, Renaissance officialssaid.

What does Husky Energy offer to the market? Just looking at thisyear, the merger, on paper anyway, offers quite a lot. Inexploration and production, Husky Energy would produce an estimated184,000 barrels of oil and gas liquids a day and 681.5 MMcf/d ofnatural gas. It would have proved reserves of 610 MM/barrels of oiland gas liquids, 2.529 Bcf/d of natural gas. Probable reserveswould be 514.7 MM/barrels of oil and liquids and 426 Bcf/d of gas.And in western Canada, there would be 10.4 million acres ofundeveloped land.

Its oil and gas production would include operations in allwestern Canadian provinces and east coast offshore projects inNewfoundland, which holds 72.5% of the proposed White Rose oilproject, 12% of the Terra Nova project now in development and 16other explration and discovery licenses. It also would haveinternational operations in Indonesia and Libya.

The Husky Energy refining, marketing and pipeline operationswould offer heavy oil upgrading capacity of 65,000 bpd at anupgrading plant at Lloydminster, with 35,000 bpd of refiningcapacity and more than 500,000 bpd of pipeline throughput capacity.There also would be 597 Husky and Mohawk branded retail outletstations.

Carolyn Davis, Houston

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