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Calgary's Husky Oil, Renaissance Join Forces

Calgary's Husky Oil, Renaissance Join Forces

In a deal that is being called the biggest in the Canadian energy industry this year, two Calgary companies, Husky Oil Ltd. and Renaissance Energy Ltd., agreed last week to merge into Husky Energy, a move that will catapult the new company into the top tier of 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 gas producer, Husky Energy also will hold the title of Canada's fourth largest energy company overall after Imperial Oil Ltd., Shell Canada Ltd. and Petro-Canada, producing about 252,000 boe/d with reserves of more than 1.43 billion boe, converting gas to oil on a 10-to-1 basis. Analysts say if first-quarter results are annualized, the merger in 2000 will result in estimated annual revenues of more than C$5 billion, earnings of more than C$485 million, and cash flow of C$1.55 billion.

The newly formed Husky Energy would have a stock market value of C$7.2 billion, and become one of the top Canadian heavy oil, oil sands and East Coast offshore operators. Under terms of what is considered a friendly offer, Renaissance shareholders may choose to take 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 of capital of C$2.50 per share in the merger. Based on an estimated total value of C$19.40 a Renaissance share, the offer represents a 28% 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 in realizing future growth potential," said Husky's current and future CEO John Lau, who has led the company since 1993. "We have high regard for Renaissance, its achievements and its people."

Renaissance, which at one time had been a darling of the Canadian energy companies and is still one of the leading oil and gas producers in the country, has been struggling for about three years now because of high production costs. The company has long had a reputation for buying up huge tracts of land in western Canada and then drilling wells quickly to keep its production growing.

However, Renaissance's high-risk method of exploration and production began to backfire in 1997, and the company began to lose value and a lot of its glamour. Earlier this year, Clayton Woitas, Renaissance's longtime CEO, resigned, and the company has since been looking for a new direction.

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

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

In 1999, nearly 50% of Husky's operating profit was generated by its upstream operations, which include the exploration, development and production of crude oil, natural gas and NGLs. The company's upstream operations are mostly located in western Canada and offshore the east coast of Canada.

Lau said last week that he expects the Hong Kong shareholders to keep their stakes in the company. In fact, Lau said they demonstrated their confidence in the merger by raising their stake in the new Husky Energy to 71.5% after the companies agreed to a 65-35% Husky Oil-Renaissance split. Lau also does not anticipate major asset sales when the deal is finalized. "From our point of view, all the assets are complementary to each other," he said.

Meanwhile, Renaissance Chairman Ron Greene, who would become a director in Husky Energy, said some of the combined new company's 1,800 employees may lose their jobs. Husky now has about 1,000 employees while Renaissance has 800. "There will be some duplication, obviously, but we think it will be minimal," Greene said. "We do not want to have the implication that we're out to cut costs by cutting employees. That's not our business plan here."

Greene said the transition would be invaluable to current Renaissance shareholders because the merger would move the company into "several new medium and long-term upstream operating areas as well as midstream/downstream activities." Shareholders are expected to vote on the merger at the end of August, Renaissance officials said.

What does Husky Energy offer to the market? Just looking at this year, the merger, on paper anyway, offers quite a lot. In exploration and production, Husky Energy would produce an estimated 184,000 barrels of oil and gas liquids a day and 681.5 MMcf/d of natural gas. It would have proved reserves of 610 MM/barrels of oil and gas liquids, 2.529 Bcf/d of natural gas. Probable reserves would 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 of undeveloped land.

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

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

Carolyn Davis, Houston

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