Conoco to acquire Gulf Canada Resources for $9.8 billion (Can.)

May 29, 2001
In its strategic push for a quick increase in North American natural gas operations, Conoco Inc., Houston, agreed to buy Gulf Canada Resources Ltd., Calgary, for $4.3 billion cash, or $6.7 billion (Can), officials said Tuesday.

HOUSTON, May 29 -- In its strategic push for a quick increase in North American natural gas operations, Conoco Inc., Houston, agreed to buy Gulf Canada Resources Ltd., Calgary, for $4.3 billion cash, or $6.7 billion (Can), officials said Tuesday.

Conoco also will assume some $2 billion, or $3.1 billion (Can), of Gulf Canada's net debt, preferred stock, and minority interest.

That acquisition will add nearly 1.4 tcf of net proved gas reserves and 2.9 net tcf of probable gas reserves to Conoco's North American holdings. It will boost Conoco's North American natural gas production by 50% to 1.4 bcfd, and its proved reserves by the same percentage to 4.1 tcf net, officials said.

Moreover, Gulf Canada holds 4 million acres o f undeveloped land in Western Canada, along with a leading position in Canada's frontier exploration region in the Mackenzie Delta.

Gulf Canada's Canadian operations will be merged into Conoco's existing subsidiary, Conoco Canada Ltd. But the combination will be headed by Gulf Canada's current management team in Calgary, which is "one of the main assets" of the acquisition, said Archie W. Dunham, Conoco chairman and CEO.

"Conoco Canada will be Gulf Canada plus 10%, because Gulf Canada is 10 times bigger," he said. "That creates a tremendous employment opportunity for all Gulf Canada employees."

Gulf Canada President and CEO Dick Auchinleck said he will remain through "a reasonable transition period" to help manage the combination of the two companies. He will retain his position on the board of Gulf Indonesia Resources Ltd., in which Gulf Resources has 72% interest.

Gulf Canada is a member of a producer group actively studying feasibility of a natural gas pipeline from the Mackenzie Delta in the Canadian Arctic. Conoco hopes to speed the process for that proposed pipeline to move more Canadian gas to US markets, Dunham said. "It will be one of our highest priorities," he said in a telephone conference call with reporters Tuesday.

Auchinleck said it would take about 5 years from the initial regulatory application to complete such a project, including "three winter seasons to drill the wells and build the pipeline. The key is to get regulatory approvals early."

With the Gulf Canada acquisition, Conoco's North American liquids production of crude, syncrude, and natural gas liquids also will more than double, while its North American liquids reserves will more than triple as a result of that deal, which is expected to close in the third quarter, officials said.

The acquisition also provides Conoco with the opportunity to transfer to Canada some of the experience gained from its heavy oil operations in Venezuela. Gulf Canada holds 9% interest in Syncrude Canada Ltd., a joint venture that produces and upgrades heavy tar sands in northern Alberta, into light, sweet crude.

With the addition of Gulf Canada's total proved reserves of more than 1 billion boe, Conoco's global reserves will jump almost 40% to 3.7 billion boe, while its total worldwide production will increase 32 % to 335 million boe this year, said company officials.

As a result, Dunham said, "95% of Conoco's proven reserves will be positioned in our four core areas of North America, Southeast Asia, Europe, and northern South America. Gulf Canada's growth initiatives in Canada and Southeast Asia add further strength and balance to our significant Gulf of Mexico deepwater and Venezuelan positions, and programs in the Middle East, Caspian Sea, and West Africa."

The acquisition will establish Southeast Asia as "a strong, fourth core business area" for Conoco through Gulf Canada's majority interest in Gulf Indonesia Resources, said Dunham.

Conoco will more than double its proved reserves in Southeast Asia to 365 million boe and more than triple its net production last year from that region. The combination also will give the company access to another 1.5 tcf of probable reserves, officials said.

Both companies have major long-term gas sales contracts in Southeast Asia for delivery of some 3 tcf of gas, net, with production to exceed 400 MMcfd in 2005. Gulf Canada's recent exploration successes in Sumatra, the Natuna Sea, and off Java complement Conoco's recent discoveries and current positions in Indonesia, Malaysia, and Viet Nam, where it is "the largest non-Vietnamese producer," said Dunham.

The combination of the two companies is expected to produce an annual pretax cost savings of $150 million, primarily from high-grading exploration opportunities and reducing administrative and operating costs, officials said. Conoco officials said it will be immediately accretive to the company's earnings and cash flow.

Initial acquisition financing has already been arranged. To help pay that cost, Conoco will suspend its share repurchase program.

The deal is subject to US and Canadian regulatory approvals and by shareholders. Conoco Canada will soon file for approvals and mail to Gulf Canada shareholders a definitive tender offer of $8.02/share cash.

That amounts to $12.40(Can.), or a 35% premium over Gulf Canada's closing price of $9.18(Can.)/share on Friday, officials said.

"It's the right offer at the right time and at the right price," said Auchinleck. Gulf Canada's board of directors unanimously approved the proposed sale.

If the pending sale falls apart, Gulf Canada agreed under certain circumstances to pay Conoco a breakup fee of $220 million (Can.)