January 25, 2002 --- Vol. 8, No. 9January 2002

Alberta Energy, PanCanadian confirm merger talks underway

Alberta Energy Co. Ltd. and PanCanadian Energy Corp. have confirmed what others have speculated for three months what would take place -- they are in merger talks that, if successful, will create North America's largest natural gas producer.

The two dominant Calgary-based independents were forced by the Toronto Stock Exchange to disclose today that they are holding discussions "regarding a potential merger of equals."

But, while shares of both companies surged, they said no deal has been struck "and there can be no assurance that an agreement will be reached."

Rumors of a potential merger first surfaced in mid-October when PanCanadian chief executive officer David Tuer resigned "for personal reasons," amid speculation that he had lost a boardroom showdown over an acquisition.

A combined AEC and PanCanadian would have a market capitalization of more than C$20 billion and production of 300,000 barrels a day of oil and 3 billion cubic feet of gas.

During the past two years, when a host of other Canadian-based independents have been swallowed, mostly by U.S. buyers, the two companies have embarked on ambitious expansion programs.

AEC has taken land positions in Alaska's North Slope and Brooks Range foothills, acquired two leading U.S. Rocky Mountain producers, McMurry Oil Co. and Ballard Petroleum LLC, and pushed ahead with development of its major stake in Ecuador's Oriente Basin and the Gulf of Mexico. As well, it is a key player in Western Canada's gas fields, Alberta's oil sands and the Mackenzie Delta.

PanCanadian, spun off last year from its parent company, Canadian Pacific, has the most prized land-holdings -- 6.5 million acres of freehold land in southern Alberta, where it pays no royalties on what represents half its production.

As well, PanCanadian is active in the Gulf of Mexico, Canada's East Coast offshore gas fields and the U.K. North Sea, where it said last week that the Buzzard discovery is estimated at a net 400 million barrels.

Peter Linder, an analyst with Research Capital Corp. in Calgary, said the merger is "effectively a done deal," and predicted a formal announcement within a couple of weeks.

He said a deal "makes a lot of sense, because each company offers the other new core areas."

Linder said AEC chief executive officer and president Gwyn Morgan would be favored to head up the new entity.

He said there was only a "low probability" of a U.S. company launching a bid for either or both companies, suggesting that many prospective U.S. buyers have walked away from Canada "because of the correction in natural gas prices."

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