On its way to becoming the leading North American independent, Oklahoma City-based Devon Energy Corp. will become the biggest owner of Mackenzie Delta-Beaufort Sea drilling prospects if its takeover bid for Anderson Exploration Ltd., announced last week, succeeds.
Devon Energy Corp. CEO J. Larry Nichols said it would have been “difficult, if not impossible” to get the type of acreage in Canada that Anderson Exploration Ltd. already held, and that was the main reason the Oklahoma City-based producer tried for months to acquire the company. Now that Anderson’s board has agreed to the $4.6 billion acquisition, and assuming stockholder ratification, Devon is expected to become the leading North American independent, a post currently held by Anadarko Petroleum Corp.
The Calgary target of the acquisition entered 2001 in the sixth spot on the Canadian gas rankings with production averaging 626 MMcf/d. Only Alberta Energy Co., PanCanadian Petroleum Ltd., Canadian Natural Resources Ltd., Talisman Energy Ltd. and Petro-Canada were bigger. Devon, operating as Northstar Energy north of the border as a result of an earlier acquisition, already ranked 20th in Canadian gas with production of 171 MMcf//d.
Devon also stands to inherit an ambitious Arctic expansion program launched by Anderson two years ago. The Calgary company holds 1.9 million acres (2,970 square miles) of leases on the Delta and shallow Beaufort waters off its coastline, in trade for commitments to do C$370 million (US$246 million) in exploration work over the next few years. Anderson also has long-term interests in the Yukon Territory that bring its total commitment to northern gas hunting to about C$500 million (US$330 million).
Devon will inherit an ambitious Delta-Beaufort campaign which is already under way, including a first well on the Anderson spread at a location about 10 miles south of Tuktoyaktuk this winter. A C$70 million (US$47 million) Beaufort marine-seismic survey began in August, continues until the sea freezes over for the winter then resumes after the ice melts next summer.
Canadian industry insiders and northern authorities accepted the transaction at face value, voicing hope that Devon will continue the Anderson expansion drive. Among Canadians, the takeover for US$3.4 billion in cash plus $1.2 billion in debt assumption was also viewed as a breathtaking case of accomplishment by a stellar entrepreneur.
After arriving on scene as an engineer with Amoco Canada, the Nebraska-born J.C. Anderson came to stand out as “Mr. Natural Gas” in Canada for starting his company from scratch with a late-1960s discovery in northern Alberta near Peace River and continuing to concentrate on the commodity for his entire history in Canada.
Known to one and all, well beyond industry circles, as J.C. rather than his names James Carl, the 70-year-old Anderson still owned about 7% of his vastly enlarged brainchild when Devon came along with an offer he had not solicited but that it was believed shareholders could not refuse. Still to come under Canadian securities law, before the transaction can proceed to final approvals, is a test of whether Devon succeeds in obtaining a minimum two-thirds of Anderson’s shares on open markets with its offer.
Devon is offering C$40 a share for all the outstanding common shares of Anderson. The offering has been mailed and is open for acceptance until 1:01 a.m. Calgary time on Oct. 12, unless withdrawn or extended. The acquisition adds strength to Devon’s operations, boosting its asset base from the Mackenzie Delta into the Rocky Mountains, down through the Texas Barnett Shale and into the Gulf of Mexico, said Nichols. It will not change the company’s historic oil and gas mix, with two-thirds of its assets in gas, and one-third in oil. “This is a comfortable number for us,” he said.
In the acquisition, Devon acquires estimated proved reserves of 532 million boe and about eight million net undeveloped acres, and has allocated $680 million of the aggregate purchase price to Anderson’s undeveloped acreage and seismic data. Devon would increase its proved reserves by 35% to approximately 2 billion boe in the deal, and its North American reserves would increase to 87% of Devon’s worldwide reserves, giving it more North American oil and gas reserves than any other independent.
Devon’s North American gas production would increase to 2.2 Bcf/d, up from its current 1.6 Bcf/d. North American liquids production would increase to approximately 180,000 boe/d, up from 125,000 boe/d. The deal also complements Devon’s existing Canadian asset base in the Peace River Arch, Foothills and Northern Plains areas, with its Canadian reserves growing to 32% of the total company.
Anderson holds eight million net undeveloped acres in Canada, including six million in the Western Canadian sedimentary basin and two million acres in northern Canada with holdings in the Northwest Territories, the Yukon, the Mackenzie Delta and the Beaufort Sea.
The mega deal follows Devon’s agreement Aug. 14 to acquire The Woodlands, TX-based independent Mitchell Energy & Development Corp for $3.5 billion (see NGI, Aug. 20). When both deals are completed as expected by the fourth quarter, Devon would become the largest independent oil and natural gas producer in North America. Devon and Mitchell expect to amend the preliminary joint proxy statement/prospectus that has been filed with the Securities and Exchange Commission to include the pro forma effects of the Anderson acquisition. However, neither the Mitchell nor the Anderson transactions are conditional upon each other.
“Expanding our presence in Canada has been an important objective for Devon,” said Nichols. “Anderson was at the top of our list of acquisition opportunities. J.C. Anderson has built an exceptional gas-weighted production platform with powerful exploration potential. Combining Anderson with our existing Canadian organization firmly establishes Devon in Canada.”
George P. Mitchell, CEO of Mitchell Energy and soon Devon’s largest shareholder, said he supported the Anderson acquisition, and said Devon would become the “pre-eminent North American independent.”
Nichols pointed out to analysts during a conference call that both Mitchell Energy and Anderson Exploration are “exceedingly well run” companies, with “very focused” operations, making the integration at the same time easier than if their operations were more spread out. Both Mitchell Energy and Anderson are concentrated in North America.
“If it was two U.S. companies at the same time, we probably would not do it,” said Nichols. However, he said, Devon had actually been pursuing Anderson before it began its chase for Mitchell Energy, but had been turned down until the Mitchell Energy deal was announced. “We didn’t do this deal (Anderson) in just two weeks,” said Nichols. “It’s been going on for months and months.”
Devon’s Canadian operations are conducted through its Calgary-based subsidiary, and Anderson’s operations will be merged with those operations. John Richels, CEO of the Devon Canadian office, said that he expected a “very smooth integration of Anderson’s staff and properties,” adding he anticipated a “great future for Devon in Canada.”
Anderson CEO J.C. Anderson said Devon’s offer reflected the “quality” of his operation, which he said has been the “most active exploratory driller in Canada. I believe the organization we have created will be in very good hands with Devon.”
Devon expects the Anderson acquisition to be accretive to reserves per share, production per share and cash margin per share, and dilutive to earnings per share in the near term. The agreement provides that Anderson would pay Devon a non-completion fee of C$210 million (US$135 million) in certain circumstances. Anderson has agreed to not solicit other offers, but has reserved the right to respond to a superior proposal, if one is forthcoming.
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