Conoco’s C$9.8 billion offer for Gulf Canada jolts Calgary boardrooms

Offer almost doubles previous largest acquisition; big prizes are 580 million cubic feet per day of gas and foothold in Mackenzie Delta area

Gary Park

PNA Canadian Correspondent

Conoco, with its sights squarely fixed on the Arctic, cranked up the level of cross-border shopping with a record-shattering C$9.8 billion (US$6.5 billion) takeover offer for Gulf Canada Resources.

The Houston-based independent sent a seismic jolt rattling through the boardrooms of downtown Calgary by offering a 34 percent premium for the shares of Gulf Canada, which just three years ago was seen as a financial wreck, with debts of about C$3 billion.

In the process, it almost doubled the previous largest acquisition of a Canadian-based company — Amoco’s 1988 purchase of bankrupt Dome Petroleum for C$4.5 billion.

Although Gulf Canada has agreed to pay a C$220 million breakup fee if the deal does not go ahead, analysts believe there is still ample scope for a competing bid and for several days speculation turned to Royal Dutch/Shell which was still licking its wounds after losing a bid for Barrett Resources and was seen as a likely buyer to complement its existing Mackenzie Delta assets.

“As we have seen in this market, lots of things that we hadn’t expected have happened, so you have to assign some probability to the chance that Shell or another party will choose to enter the fray,” said Mike Tims, chief executive officer of Calgary investment bank Peters & Co.

Part of the conjecture was based on the fact that Conoco, if it closes the transaction, will pay only C$9.20 per barrel of oil equivalent for Gulf Canada’s reserves, slightly below average for acquisitions over the past years. In return it will get more than 1 billion boe of worldwide reserves in Canada, Indonesia and the Dutch North Sea, plus an oil sands lease estimated at 15 billion barrels.

Gas, Mackenzie big prizes

“We face a fundamental shortage of natural gas over the next three to five years and strategically that certainly influenced our decision to proceed with this acquisition,” said Conoco chief executive officer Archie Dunham.

Gulf Canada chief executive officer Dick Auchinleck, after 28 days of negotiating with Dunham, was certain “a key factor” was Gulf’s known Delta reserve of 3.2 trillion cubic feet.

Dunham agreed that the prospect of developing Delta gas will be Conoco’s highest priority project.

“We’re going to use all of our global relationships with the partners involved in that project (ExxonMobil and Shell) to press them to accelerate their timetable,” he said.

Dunham said it’s not clear whether the North Slope or Mackenzie Delta will proceed first, but was emphatic — echoing Auchinleck’s long-held view — that two pipelines will be needed.

“The U.S., the continent, the hemisphere needs this gas and I think it’s going to be developed as expeditiously as possible,” Dunham said.

He said all options for Arctic gas will be considered, including the conversion of raw gas to LNG, a technology Conoco will soon start testing at a pilot plant in Oklahoma.

Canadian companies “swallowed up”

But the Conoco bid triggered a wave of newspaper excitement, with references to takeover “targets” as “vulnerable,” or “swallowed up” by an American “invasion” by companies “picking over the remains” of Canada’s oil industry.

One columnist wrote that Gulf Canada “certainly won’t be the last of the majors in Alberta’s oil and gas patch to fall into the hands of (Dick) Cheney’s chums.”

Another suggested that Gulf “will be run by remote control from Texas,” notwithstanding Dunham’s pledge that Gulf Canada would continue to run its own operation and Conoco “would stay in Calgary.”

The assumption that Canada has lost control over its oil and gas resources was challenged by the Canadian Association of Petroleum Producers, which estimated that 43 percent of domestic production is in the hands of foreign, mostly U.S., companies.

It said that figure would rise to barely 45 percent if Conoco completed the acquisition because of the existing foreign ownership of Gulf Canada shares.

However, CAPP’s figures also included overseas production by Canadian-based firms, led by Nexen, Talisman Energy and Alberta Energy Co.

Talisman chief executive officer Jim Buckee said that excluding those numbers would mean close to 60 percent of Canada’s domestic industry was in foreign hands — still some distance from the 74 percent in 1977, before the Canadian government embarked on a policy to penalize “outsiders” and spent billions of dollars in grants and loans to promote exploration by Canadian companies, an approach that sent many U.S. companies scurrying back to their Texas and Oklahoma bases.

No government anxiety

Prime Minister Jean Chretien rejected any suggestion that Canada’s energy needs or sovereignty are at risk, while Alberta Energy Minister Murray Smith said open trade policies that allow U.S. companies to pick off Canadian firms also work in reverse, noting that Alberta Energy Co. has spent C$1.5 billion over the past year buying Montana-based Ballard Petroleum and Wyoming-based McMurry Oil, while PanCanadian Petroleum paid C$702 million for Montana Power’s E&P business.

But the pace of takeovers from the United States showed no signs of slackening. In the two weeks following the Conoco-Gulf announcement, Oklahoma-based Samson Investment snapped up junior producer Courage Energy for C$142 million; Houston-based El Paso forked over C$505 million for Velvet Exploration; and Dallas-based Hunt Oil made a C$915 million offer for Chieftain International.

For Hunt it was proof positive that friendly works better than hostile. In the past 15 months it has launched two hostile takeover attempts — losing to Anderson Exploration in a race for Ulster Petroleum and getting outbid by Anadarko in a tussle over Berkley Petroleum — before lifting its batting average to .500 with the friendly offers for Newport Petroleum and Chieftain.