PanCanadian and Alberta to Form Energy Powerhouse

In a deal creating the world's largest independent oil and natural gas exploration and production company, PanCanadian Energy (PCX Quote) agreed Sunday to acquire Alberta Energy (AOG Quote) for $6.57 billion in stock.

Billed as a "merger of equals" by both Calgary-based parties, Alberta Energy shareholders will receive 1.472 shares of PanCanadian for each share of Alberta they own. Upon closing, PanCanadian shareholders will own 54% of the new company, to be named EnCana. PanCanadian will also assume nearly $3 billion in debt.

Based on Friday's closing prices in New York, the deal is worth about $41.66 per Alberta Energy share, a 13% premium. Alberta stock, which closed Friday at $36.99, rose nearly 7% last week after speculation about the merger surfaced. Both companies acknowledged they were in merger talks Friday after the Toronto Stock Exchange formally requested a response to the speculation. The stocks trade on both the Toronto and New York stock exchanges.

The companies expect the merger to close in early April, subject to regulatory approvals.

Canadian Focus, International Reach

The merged EnCana entity would be the world's largest independent exploration and production company, leaping over the current leader, Houston-based Anadarko Petroleum (APC Quote). EnCana projects 2002 production of 700,000 barrels of oil equivalent (BOE) a day, with hopes of increasing to 1.1 million BOE a day by 2005. EnCana will have proven reserves of 2.6 billion BOE and more than 37 million acres of undeveloped land.

"The merger would create an absolute powerhouse in exploration and production," says Scott Walters, a trader at Toronto-based Research Capital. The combined companies will have an enterprise value -- market capitalization plus debt -- of approximately C$27 billion (US$16.8 billion).

Many analysts and investors, including Walters, have suggested that the two Canadian companies may have joined together to avoid being taken over by a U.S. company -- possibly even Anadarko -- looking to Canada for growth. But company executives say that consideration had little to do with the merger.

"Why shouldn't two Canadian companies come together and build a powerhouse?" asked Alberta Energy CEO Gwyn Morgan at a Sunday press conference announcing the merger. "It's not a question of waiting for somebody to come and see if they want to buy either one of us. This is a chance to build something that is strong and better than anybody else could build."

Morgan, who will be EnCana's CEO, and PanCanadian Chairman and CEO David O'Brien, who will serve as nonexecutive chairman, both said they haven't received overtures from other potential suitors.

The combined companies will cast an international footprint with significant natural gas production in Alberta and British Columbia as well as in the U.S. Rocky Mountains. In addition, the company will have major exploration projects in the Northwest Territories, Alaska and offshore Nova Scotia.

In the oil patch, production comes from Saskatchewan and Alberta with additional exploration and production projects in the Gulf of Mexico, South America, Azerbaijan, the Middle East and the North Sea, including PanCanadian's recent Buzzard discovery, one of the largest in the North Sea in more than a decade.

EnCana will also have significant pipeline and storage assets, including the AECO-C hub in Alberta, the main Canadian exchange point for natural gas trading, as well as natural gas power plants in Alberta.

The combined companies expect to save C$250 million from streamlined operations in the first year and an additional C$250 million from cost savings in their capital-spending program. EnCana expects a capital-spending budget of C$3.8 billion in 2002.

The deal is expected to be accretive to PanCanadian's 2002 cash flow and neutral to the company's earnings per share.

Other Suitors, More to Come

However, it's not a done deal yet. Walters thinks that its all-stock nature might attract other bidders.

"Watch the big U.S. companies make a run at PanCanadian or Alberta now, since there is no cash involved," he says. "The deal could easily fall prey to another bid."

But others think the deal's C$350 million break-up fee will deter other suitors. "It will probably be big enough to keep other bidders away," Canaccord Capital analyst Gord Currie told the Toronto Globe and Mail Sunday.

The new year's first major deal in the oil patch follows a very busy 2001 for energy mergers, especially in Canada. Last fall, Burlington Resources (BR Quote) purchased Canadian Hunter Exploration, and Devon Energy (DVN Quote) bought Anderson Exploration.

Whether or not Anadarko or others make competing bids for PanCanadian or Alberta, the proposed merger shines a light back on the possibility of additional combinations among Canadian energy companies. A handful of Canadian companies could return to the spotlight, including Talisman Energy (TLM Quote), Rio Alto Exploration (RAX:Toronto) and Husky Energy (HSE:Toronto). All three are well below their 52-week highs as the hope for consolidation gives way to the reality of depressed oil and natural gas prices.

This latest deal, however, may well refocus investors on the possibilities.