The $2.5 billion acquisition of Poco Petroleums Ltd. of Calgarywould give Houston-based Burlington Resources Inc. (BR) a Canadianpresence and make the gas-focused company the third largest holderof gas reserves in North America. BR already ranks first among U.S.independent producers in terms of proved U.S. reserves. Late Mondaythe companies announced the stock and debt deal.

“Establishing a major presence in Canada enhances our positionas a dominant independent E&P company with a strong NorthAmerican natural gas focus,” said Burlington CEO Bobby Shackouls.”Poco Petroleums is an excellent partner to enable us to achievethat objective. Under the leadership of Craig Stewart and hiscolleagues, Poco has assembled an outstanding set of assets andoperational skills that complement our own, and has built anorganization that shares our obsession with value creation andentrepreneurial culture.”

The combined company would be the fourth-largest gas producer inNorth America and the largest among independent E&P companies.Combined worldwide reserves were 9.9 Tcfe as of Dec. 31. Combined1998 worldwide gas production was 2.1 Bcf/d; oil production wasabout 106 thousand barrels/d; the total net worldwide acreageposition was 21.4 million acres, with 3.6 million acres in Canada;and operating cash flow was about US$1.1 billion (C$1.6 billion).On Monday, combined equity market capitalization was about US$9.9billion (C$14.6 billion).

“The addition of Poco’s 3.1 million acres of undevelopedleasehold to our quality fee mineral and acreage positions willsignificantly enhance our inventory of high-potential explorationinventory,” said Shackouls. “The combined company will befinancially strong, with long-term debt comprising approximately42% of the book capitalization of the company. BR, with Poco as itspartner in Canada, will be better positioned than at any time inits history to continue the implementation of our aggressive,global, value-oriented capital program.”

Most of Burlington’s production came out of the San Juan Basinof New Mexico. It also has operations in the Midcontinent,including the Rocky Mountains, the deep-water Gulf of Mexico, theEast Irish Sea, the North Sea, North Africa and Latin America. Its2Q98 net income was $15 million, down from $23 million. Still, theresults were an improvement over the previous two quarters, notedShackouls.

Shackouls said BR currently has no assets north of theU.S.-Canadian border and that there is virtually no overlap betweenthe two companies’ operations. It is expected that nearly allemployees of Poco will become part of the combined enterprise,which will continue to have a major presence in Calgary.

Poco, which operates in western Canada, pursues high-impact, deepgas exploration in its northern region and liquids-rich gas in itswestern region. The smaller eastern region is in harvest mode. Poco,which is Canada’s ninth largest gas producer with 1998 averageproduction of 490 MMcf/d, last month made a deal with Chevron in whichit secured 50% ownership of its pick of prospects from 400,000 Chevronacres (see Daily GPI July 26, 1999).

Last week, Poco announced results for the first half of 1999that included higher volumes for gas-related production and a majorreduction in finding and development costs. Gas productionincreased 6% over the first half 1998 to 502.2 MMcf/d, while gasliquids production rose 17% to 22,457 barrels/d. Daily crude oilproduction declined 22% to 16,352 barrels/d due to Poco’s strategicshift away from oil drilling and the sale of crude oil propertiesin 1998.

“Poco recognized a number of years ago that the traditionaldiscount that Canadian gas was trading for relative to prices inthe United States would disappear,” said Poco CEO Craig W. Stewart.”We also believed strongly that prices would rise in North Americaas a whole, and positioned our production base towards natural gas.Importantly, we also invested heavily in land and seismic, allowingus to pursue a large ongoing natural gas-directed explorationprogram. By joining forces with Burlington Resources, thepre-eminent ‘super-independent’ E&P company, we will become amajor part of a combined enterprise with the size and scope,operating skills and financial resources to more aggressivelypursue the growth opportunities we have both identified in Canada,the United States and around the globe.”

Poco’s share price had been disappointing of late in anenvironment of improved Canadian gas prices. Burlington sharesclosed down Tuesday $2.56/share at $42.75/share, a 5.66% decrease.Poco shares closed up $1.80 at $15.20 on the Toronto StockExchange, a jump of 16.09%. Analysts fretted that Burlington ispaying too much for Poco

Poco shareholders will receive BR common equivalent shares(exchangeable shares) based on a fixed exchange ratio of 0.250exchangeable shares for each Poco share held. Based on BR’s closingstock price on Monday the exchange ratio represents an impliedprice of about C$16.78 (US$11.33) per Poco share. Given theassumption by BR of about US$750 million (C$1.1 billion) of Pocodebt, the transaction has a total value of about US$2.5 billion(C$3.7 billion). The agreement was unanimously approved by theboards of both companies.

The transaction is expected to be accounted for as a pooling ofinterests and to qualify as a tax-free reorganization. It isanticipated that, excluding the impact of any one-time transactioncharges, the deal will be immediately accretive to earnings, cashflow and net asset value per share in 1999 and beyond. Dealcompletion is expected by year-end.

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