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Gulf Canada Swallows Smaller Rival Crestar

Gulf Canada Swallows Smaller Rival Crestar

Gulf Canada Resources is expecting to more than double its daily gas production by swallowing rival Crestar Energy in a C$1.7-billion ($1.1-billion) friendly cash and stock transaction, excluding C$565 million in debt assumption. The combination will form a top-five Canadian independent production company with plenty of room to grow.

Gulf said last week it is offering 3.333 of its shares plus C$3.25/Crestar share in cash, which adds up to about C$29.75/share, or about a 19% premium over Crestar's closing price on Friday. Gulf also is assuming C$565 million of Crestar's debt, boosting the total value of the transaction to C$2.3 billion.

"It will position us for growth well into the future," said Gulf CEO Dick Auchinleck. "It strengthens our balance sheet, such that our debt levels come more in line with other senior producers. It provides strong near-term cash flow that can be allocated more efficiently across the asset base of both companies."

He also noted the transaction doubles Gulf's western Canadian undeveloped land base. It more than doubles Gulf's western Canadian conventional production. "And probably most important, it more than doubles our western Canadian gas production to over 615 MMcf/d and that makes us a major player in the North American gas market."

The combined entity would produce 288,000 barrels of oil equivalent a day in 2001, before anticipated asset sales of up to 20,000 boe/d. Combined proved oil reserves would be 586 million barrels and gas reserves would total 3.3 Tcf.

The deal has a number of other positives, not the least of which is that it ends a long period of asset sales and debt reduction for Gulf. Gulf had been selling assets worldwide since 1998 to reduce its debt. It also provides for significant tax deductions at a time when high commodity prices are expected to lead to high tax bills in the industry, the companies said.

Gulf's cash flow per share is expected to increase 14% in 2001, and its earnings per share are expected to rise by 20-25%. All of Crestar's taxable income next year would be sheltered by Gulf's tax deductions.

"It brings significant benefits to Crestar's shareholders," said Crestar's CEO Barry Jackson. "It gives our shareholders access to Gulf's diversified and unique assets, including Syncrude, Surmount, the Mackenzie Delta, East Coast and international areas, all of which clearly have significant long-term growth potential; it broadens the size and increases the liquidity of the shareholder base; and it creates a critical mass and scope of operations, with the capacity to compete aggressively in the international E&P arena."

Crestar said it would not solicit any other offers, and agreed to pay Gulf a C$50-million fee if the deal is not completed. Gulf's offer will be conditional on not less than 66 2/3 % of Crestar's shares being tendered. The offer will be open for 21 days following the mailing of the take-over circular.

Gulf's stock in Toronto was off C75 cents following the announcement, or about 9%, to C$7.20. Crestar's shares, however, jumped C$1.85, or 7%, to C$26.85. Some analysts said Gulf investors may have been expecting more asset sales from the company prior to this large purchase. The company still is trying to sell its share of a Canadian heavy oil venture with PanCanadian Petroleum.

Rocco Canonica

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