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Mr. Eau and Mr. Dale cook up a C$27 billion oil and gas blockbuster Brains behind Alberta Energy Co. and PanCanadian Energy find a match in their contrasting styles by agreeing on the concept of a ‘merger of equals’ By Gary Park PNA Canadian Correspondent
Operation Zebra did a masterful job of lying low until almost the last minute when the rumor mill caught up with three months of clandestine negotiations aimed at merging Alberta Energy Co. Ltd. and PanCanadian Petroleum Corp. into the biggest independent oil and gas giant in the world.
Shares of both Calgary-based companies started soaring on Jan. 24. On Jan. 25, at the behest of the Toronto Stock Exchange, they admitted discussions were taking place “regarding a potential merger of equals.” On Jan. 27, the deal was done, creating EnCana Corp. with an enterprise value of C$27 billion.
It was a coup for both of the principals — Gwyn Morgan, president and chief executive officer of AEC and designated to carry both titles to EnCana, and David O’Brien, chief executive officer of PanCanadian and named non-executive chairman of EnCana.
Relentlessly upbeat, Morgan, 56, has attracted a few snickers in recent years by openly declaring his ultimate goal of turning AEC into a global super-independent. The cynics have gone into hiding in the last few days.
O’Brien, 60, is seen as a consummate business professional, as befits a man who was chairman, chief executive officer and president of the Canadian Pacific Ltd. and engineered last year’s break-up of the C$18 billion conglomerate into five independent companies, including the often dowdy, slow-moving PanCanadian. Chemistry needed It needed the chemistry to work between those two to hatch Operation Zebra (symbolizing two companies that wanted to change their stripes) and for EnCana to emerge from their furtive activities.
When David Tuer resigned as PanCanadian chief executive officer last October, Morgan seized the initiative, obtaining the unanimous backing of AEC’s board of directors to pursue a merger with PanCanadian.
On Oct. 16 he made a phone call to O’Brien, who asked for a “little time” to weigh the idea. Two weeks later, the negotiations moved into high gear— Morgan using the code name Mr. Eau, because of lives in a condominium in downtown Calgary’s Eau Claire district; O’Brien, who lives in Calgary’s Riverdale community, opting for Mr. Dale. Morgan’s crowning achievement The end result is “Gwyn Morgan’s crowning achievement,” said a source close to the discussions, capping seven years when he has grown AEC’s production, reserves, cash flow and profits at a staggering annual compound rate of 15 percent.
A petroleum engineer, he joined AEC in 1975, two years after the Alberta government — to a chorus of industry disapproval — created the company to give “the people of the province” a chance to gain an equity stake in the oil industry.
As a vigorous opponent of government involvement in the private sector, he campaigned to privatize AEC by travelling across the province to urge Albertans to buy shares.
AEC at that time was a tangle of interests in oil and gas, petrochemicals, forest products, coal and steel. But the initial public offering was oversubscribed with more than 50,000 subscribing for part of the issue. Even today, up to 50 percent of AEC’s investors own less than 30 shares.
Over the last 25 years, Morgan has been instrumental in unloading non-core assets and building AEC into an oil and gas powerhouse. Threat of predators For long enough, AEC was like all senior producers in Canada, unable to find a way to grow domestically and threatened by predators, especially from the United States.
Morgan tackled that challenge by applying his philosophy of “set no small goals.”
In 1998 and 1999 he completed two hostile takeovers, both launched at the bottom of the industry cycle, snapping up Amber Energy Inc. for C$482 million, when the heavy oil producer had once boasted a market value of C$1.6 billion. Next was a C$474 million deal to acquire Pacalta Resources Ltd. and become the lead player in Ecuador’s Oriente Basin — one of AEC’s major growth platforms.
Those deals more than tripled AEC reserves and production.
Gord Currie, an analyst with Canaccord Capital Corp., said the Ecuador deal raised AEC from a “purely domestic company to a legitimate international player.”
Two more prizes were added to the AEC trophy case in 2000 and 2001 for a total cost of C$1.25 billion — McMurry Oil Co. and Ballard Petroleum LLC, both privately owned operators in the U.S. Rocky Mountains, with assets that are expected to contribute 400 million cubic feet per day of gas production to EnCana’s output by 2005. Nationalist stature Although the prospect of a rival bid, especially for PanCanadian, still looms as a possibility, completion of the EnCana transaction would give Morgan new stature among Canadian nationalists, who have become jittery over recent years during the exodus of Canadian companies to U.S. control.
Last year, an estimated 80 percent of the C$40 billion in mergers and acquisitions was initiated by U.S. buyers, meaning that decision-making for more than 50 percent of Canada’s oil and gas production is now in American hands.
“The only reason we survived is that we kept making moves faster than the companies that wanted to knock us off,” Morgan said in one interview.
And anyone coveting the assets Morgan has accumulated for AEC will have to get out of bed early in the day. He is so committed to his job that he confesses it’s 20 years since he last had a two-week break. His usual style is to squeeze three- and four-day holidays into his schedule. No sunset for O’Brien Just a year ago, the Financial Post in Toronto carried a headline “O’Brien rides off into the sunset,” as he announced the dissolution of Canadian Pacific — the empire which built the trans-continental railway in the 1880s, a project widely seen as the most vital link in establishing Canada as a nation.
O’Brien said that as his job disappeared so would he, observing: “It’s nine parts exhilaration and one part nostalgia.”
He worked in Montreal as a corporate lawyer, joined Petro-Canada in 1978, returned briefly to Montreal in 1989, then jumped back to the West in 1990 as chairman, president and chief executive officer of PanCanadian.
During that tenure, he shook up a wealthy but tired company with a round of layoffs, slashed budgets and an aggressive exploration program, seeking out partners for frontier exploration and linking up with the then Soviet government to produce oil in Siberia.
By the time he moved into the Canadian Pacific top floor in 1994, PanCanadian had become the single largest contributor to the company’s bottom line.
However, O’Brien’s notion of slipping quietly into retirement was interrupted in October when Tuer quit and he added the chief executive’s job to that of chairman at PanCanadian and almost immediately become part of the biggest oil and gas building project in Canadian history.
“I don’t know if either company was at risk,” he said in an interview with the Calgary Herald after the deal was announced. “We thought, we don’t want to sell PanCanadian and Gwyn didn’t want to sell AEC. We think they’re wonderful companies with wonderful potential and that’s why we came to the concept of a merger of equals.” PanCanadian riches PanCanadian, owed 87 percent by Canadian Pacific until it gained its independent last October, has a wealth of riches.
It has more than 9 million net acres of undeveloped land in Western Canada, much of it freehold , held in perpetuity on which it owns the mineral rights and pays no royalties.
Those so-called legacy lands account for more than half of PanCanadian’s oil and gas production and were inherited from Canadian Pacific, which received them as partial payment for building the railway.
PanCanadian has assets valued at C$9 billion, reserves of about 4.3 billion barrels of oil and liquids and 3.7 trillion cubic feet of gas, encompassing core areas in Western Canada, Canada’s East Coast offshore, the Gulf of Mexico and the U.K. North Sea, plus lesser interests in Australia, Brazil and Libya.
Production last year was running around 1.05 billion cubic feet per day of gas and 118,000 barrels per day of oil and liquids, despite weakened demand.
Its offshore ventures are now among its key underpinnings. Nova Scotia’s Deep Panuke field, with recoverable reserves of 1 trillion cubic feet and the prospect of more from an ongoing drilling program, is targeted for start-up in 2005 at 400 million cubic feet per day.
In the North Sea’s Buzzard field it reported last year that estimated recoverable oil is up to 300 million barrels, adding “we fully expect these numbers to increase significantly as we continue with our appraisal program.”
Among its other important plays, PanCanadian is developing technology to exploit the Christina Lake oil sands lease in northeastern Alberta and possibly elsewhere in the oil sands, while a partnership with MGV Energy Inc. is completing more than 100 exploratory and pilot wells in southern Alberta’s coalbed methane prospects, in what could be Canada’s first commercial CBM development.
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