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Vol. 10, No. 15 Week of April 10, 2005
Providing coverage of Alaska and northern Canada's oil and gas industry

CNQ could be in takeover crosshairs

From rags to riches, Canadian independent embarks on most ambitious venture yet; takes on challenge of delivering C$10.8 billion oil sands project, due to begin production in 2008

Gary Park

Petroleum News Calgary Correspondent

A high-flying legal eagle and a guy caught in a career crossroads pooled their talents in 1989 to turn a penny stock corporate wreck into a luxury liner now carrying a market value of close to C$19 billion and offering ports of call around the globe.

Murray Edwards, a securities lawyer entering his 30s, and Allan Markin, who, having clawed his way up from working-class beginnings in Calgary, was dabbling in university poetry, English and psychology courses after quitting a job as chief executive officer of Poco Petroleums, when they got together.

Edwards pooled a grubstake of C$100,000 with Markin’s knowledge of the industry to rescue a junior oil resource company, then trading at 20 cents a share, from the edge of bankruptcy.

They have since fueled the growth of Canadian Natural Resources into Canada’s second largest independent oil and gas producer.

They have also put the company on the short list of possible takeover targets, now that ChevronTexaco’s mega-deal with Unocal has stirred fresh talk of a new consolidation wave.

Cash rich, but struggling to replace reserves, analysts believe that global energy giants will find special appeal in a range of senior Canadian producers such as CNQ (the company’s stock symbol), Talisman Energy, Nexen and Suncor Energy.

CNQ moves into oil sands

Backed by the cash flow from more than 500,000 barrels of oil equivalent per day, CNQ is breaking ground on a massive scale by moving into the oil sands fold.

The C$10.8 billion Horizon project, which could yet attract partners with mining or upgrading expertise, is set to start production in the second half of 2008 and grow to 232,000 barrels per day over four years.

In addition to developing an estimated 6 billion barrels of potentially recoverable bitumen, CNQ exited 2004 with 1.12 billion barrels of proved crude oil and natural gas liquids reserves, 3.3 trillion cubic feet of natural gas and almost 13 million acres of undeveloped land.

Edwards (CNQ board vice-chairman) and Markin (the chairman), are both among a stable of co-owners of the National Hockey League’s Calgary Flames.

Now they are faced with some of the toughest stick-handling of their careers, having already seen Horizon’s price tag take a series of character-building leaps over four years as the rising costs of steel, fuel and labor were factored in.

“Now is the right time,” said Markin. “We have the right leadership team … and we have the financial capability to handle it without compromising our conventional business.”

Although CNQ executives, such as President John Langille, cautioned that risk can’t be “completely eliminated,” Markin has demanded a high level of rigor in the project’s design phase so that “we (do not) risk the company and its excellent prospects for one project.”

Chief Operating Officer Steve Laut said C$400 million has already been invested “getting it right … we should have, and do have, a greater degree of cost certainty.”

CNQ will dip into two of its growing ventures — the Ivory Coast, where output is targeted at 56,000 boe per day by mid-2006 and Cold Lake/Bonnyville heavy oil operations in northeastern Alberta where output is currently being expanded to 120,000 bpd — to generate the free cash flow that, along with CNQ’s ability to borrow, will help finance Horizon without compromising its other operations.

Growth through acquisitions

The road to this point is signposted with some of the most important takeovers in Canadian history. From a market-cap of C$75.4 million in 1993, it grabbed attention in a big way in 1996 by acquiring 5,100 bpd of oil production and 50 million cubic feet of gas, along with heavy oil properties from Amoco Canada.

Then came Sceptre Resources for C$696 million; BP Amoco’s Canadian oil properties for C$1.06 billion to also land the oil sands leases that are the basis of Horizon; Ranger Oil for C$1.69 billion; Rio Alto Exploration for C$2.4 billion; ending in 2004 with a flurry of deals — C$280 million for Murphy Oil’s assets in Canada; C$467 million for part of heavy oil producer Petrovera Resources; and C$698 million for the Canadian assets of Anadarko — all key parts of what Laut said is the strategy to enhance CNQ’s ability to complete Horizon.

From the sidelines, Credit Suisse First Boston analyst Peter Best questioned CNQ’s decision to buy assets “at the top of the market to supplement growth … we wonder if the cash would have been better spent on debt reduction ahead of the Horizon spending.”

Wilf Gobert, vice-chairman at Calgary-based investment dealer Peters & Co., took another view, putting the C$26,400 per flowing barrel of oil equivalent before royalties at the low end of what was being paid at the time, notably the C$65,000 EnCana paid Tom Brown and the C$80,000 Petro-Canada turned over for Prima.

For most observers, the Anadarko properties were consistent with CNQ’s approach that gives priority to being able to tie in facilities, eliminate duplication and build production. In the midst of this juggling, the company is pumping 1.44 billion cubic feet per day of gas from its four core operating areas in British Columbia and Alberta and is producing about 83,000 boe per day from the northern North Sea.

But, other than turning the tide on the U.S. takeover of Canadian companies, CNQ shows no signs of stepping south of the 49th parallel.



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