Calgary-based Petro-Canada on Wednesday became the third producer in two months to buy substantial assets in the U.S. Rocky Mountains, with the acquisition of Denver-based Prima Energy Corp. for $534 million (C$719 million). Prima, an unconventional natural gas producer, is debt free, and will have about $60 million in cash at closing.

Petro-Canada is the latest producer to add substantial assets in the Rockies this year, but at a lower price than some of the mega-deals announced this year. In May, Pioneer Natural Resources struck a $2.1 billion deal to acquire Evergreen Resources Inc. (see Daily GPI, May 5). In April, EnCana completed its $2.7 billion tender offer for Tom Brown Inc. (see Daily GPI, April 16), and Kerr-McGee Corp. announced a $3.4 billion deal to buy Westport Resources Corp. (see Daily GPI, April 8).

“The Prima acquisition is an excellent fit with our long-term strategy to sustain and expand our core North American natural gas business,” said CEO Ron Brenneman. “Prima has an extensive land position and strong capability in unconventional gas production, offering Petro-Canada an important new footprint and an entry into the fastest growing segment of continental natural gas supply.”

Petro-Canada had announced in March that it wanted to expand its North American business because of field decline in Canada (see Daily GPI, March 15). Last year, Petro-Canada fell short of adding enough reserves to replace its 2003 daily average production of about 800 MMcf/d. It had forecast gas output to fall about 8% this year.

Since 1994, Prima has increased production by 11% per year, to current levels of 55 MMcfe before royalties. Current production comes largely from the Powder River and Denver-Julesburg basins. Approximately 40% is coalbed methane, and the rest comes mostly from tight gas reservoirs.

The company also has an extensive undeveloped acreage position and 1,600 drillable locations identified, according to Petro-Canada. In addition to acreage in the Powder River and Denver-Julesburg basins, Prima’s 360,000 undeveloped acres include positions in the Green River, Uinta and Wind River basins. Petro-Canada expects production to double by 2007. Operations will be directed from Denver, which will be principally staffed by existing Prima management.

Prima’s published 2003 year-end reserves, converted by Petro-Canada to a before-royalties basis, were 152 Bcfe of proved reserves and 552 Bcfe of proved plus probable reserves. Prima’s estimated proved and probable reserves were audited by Netherland Sewell & Associates Inc., independent petroleum engineering consultants. The reserves also were reviewed by Sproule Associates at Petro-Canada’s request.

“Prima’s strong management team and experienced employees are a key element of this acquisition,” Brenneman said. “I welcome them to Petro- Canada and look forward to working together in the future to strengthen our North American natural gas business. We see potential here not only to develop the Prima land base, but also to expand that position and bring the value of Prima’s expertise to our core Western Canada operations in the future.”

Petro-Canada intends to finance the acquisition with a US$400 million fully underwritten credit facility, provided by BMO Nesbitt Burns, and existing committed credit lines. Following this transaction, Petro-Canada’s net debt to cash flow ratio will be about 1.0 times and net debt to debt plus equity will be approximately 30%, including the effect of its previously announced Buzzard acquisition in Canada. Petro-Canada said the ratios “are well within company targets and consistent with industry peer levels.”

The boards of directors of both companies have unanimously approved the transaction. Prima directors, senior executives and a principal shareholder, holding 21% of the outstanding shares, have agreed to tender their shares into the offer, which is expected to close in late July 2004. Petro-Canada’s offer to purchase is subject to the tender of most of Prima’s outstanding common shares on a fully diluted basis. The transaction will also be subject to regulatory clearance and other customary conditions. The merger agreement provides for a break-up fee, payable under certain circumstances to Petro-Canada, of approximately US$18 million.

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