In recent weeks, the Canadian units of several oil and gas companies have an- nounced merger and acquisition deals, strategic asset purchases, and the formation of joint venture partnerships. All companies mentioned in this article are based in Calgary, unless noted otherwise. And all monetary units are in Canadian dollars.
Among the deals:
- Samson Canada Ltd. plans to acquire Courage Energy Inc. for $5.20/share in cash and the assumption of $33 million in debt for a total transaction value of $171 million.
- Unocal Corp.'s Canadian subsidiary, Northrock Resources Ltd., made a bid for $93 million to take over Tethys Energy Inc.
- ATCO Group unit ATCO Midstream Ltd. acquired a gas gathering and processing plant from Fortune Energy Inc. and Devlan Exploration Inc. for an undisclosed sum.
- Compton Petroleum Corp. agreed to acquire Hornet Energy Ltd. for $32 million in cash and assumption of $8.2 million in debt.
- EuroGas Inc., New York, announced a deal with Epic Energy Inc. in which EuroGas will acquire a 19.9% interest in Epic in exchange for a loan and an investment in an exploration project in Crimea, Ukraine.
Meanwhile, one US-based refining company is making further strides toward holding its position as one of the largest independent refiners in the nation.
Valero Energy Corp., San Antonio, agreed to lease-with purchase options-Houston-based El Paso Corp.'s 115,000 b/d Corpus Christi, Tex., refinery. The refinery purchase is Valero's second planned acquisition in as many months.
Samson, Courage deal
Commenting on its plans to acquire Courage Energy, Samson Canada said, "This acquisition will significantly increase Samson's interests in the Fort St. John and Peace River arch areas."
The offer remains subject to the tendering of at least 66.6% of Courage shares and also regulatory approvals. All Courage directors and officers have said they intend to tender their shares to Samson Canada.
UBS Warburg acted as financial advisor to Samson Canada and will act as soliciting dealer manager.
Courage's board will recommend that shareholders accept the offer, and Courage has agreed that it will not initiate discussions or negotiations with any other party concerning its assets or shares.
Courage also agreed to pay a $6.9 million noncompletion fee to Samson Canada under certain circumstances.
Samson Canada is a subsidiary of Tulsa-based Samson Investment Co., a private oil and gas company with operations in the US, Canada, Russia, and Venezuela. Samson has operated in Canada since 1989, exploring for and acquiring production in western Canada. Samson Canada produces 13,000 boe/d.
Northrock, Tethys buy
Northrock expects its acquisition of Tethys to close in mid-July. The company's bid has the unanimous support of the Tethys board. The company will offer $2.74/share in cash for each Tethys share. Tethys has 33.9 million shares outstanding on a fully diluted basis.
Northrock will assume Tethys's debt of $19 million. The offer will be conditional on at least 66.6% of Tethys's shares being tendered.
Tethys agreed not to solicit competing offers and will pay a $4.2 million noncompletion fee.
On a US, 6:1 net basis, Tethys has proved reserves of 12 MMboe. More than 60% of the reserves are liquids-rich gas.
On the same basis, Tethys's production is 4,600 boe/d, which includes 16 MMcfd of gas.
Don Hansen, Northrock CEO, said, "We expect to increase production to more than 6,000 boe/d from the Tethys properties by the end of this year. Most of this additional production will be natural gas."
ATCO purchase
The recently built plant being acquired by ATCO is 25 km west of Slave Lake, Alta., and can process 7 MMcfd of sweet gas. The purchase includes a 36-km pipeline linked to a larger transportation system at Mitsue.
ATCO said it expects the plant to act as a catalyst for gas exploration and development in the region, which was previously limited by the lack of gathering and processing capacity.
ATCO Midstream recently announced a joint venture agreement with BP Canada Energy Co. to develop the Cranberry and Chinchaga gas gathering systems and plants in the Manning area of northern Alberta (OGJ Online, May 18, 2001).
ATCO also earlier this month closed on its purchase of Wolcott Gas Processing Ltd., which included a 12% working interest and full operation of the Empress Gas Liquids joint venture straddle plant near Empress, Alta. (OGJ Online, Mar. 19, 2001).
Compton, Hornet acquisition
Compton's cash offer for Hornet is worth $2/share, which represents a 23% premium to Hornet's 10-day weighted average trading price. The deal is expected to close by July 16.
Hornet produces 810 boe/d and says it will add 200 boe/d after installation of compression and facilities.
Compton produces 14,812 boe/d from its properties in western Canada.
Directors of both companies have approved the transaction, subject to the execution of a definitive preacquisition agreement.
Hornet shareholders must approve the deal and tender two thirds of Hornet shares.
EuroGas-Epic JV
EuroGas agreed to provide Epic with a $1 million project loan and agreed to invest $1 million in exchange for a 50% interest in Epic Energy's Uzunlarskaya exploration project.
Following completion of due diligence, EuroGas and Epic expect to enter into definitive agreements, subject to regulatory approval. The companies expect the process to take 30 days.
EuroGas will earn a participating interest in Epic's shallow oil program as part of its agreement to fund a $1 million development loan.
Apart from its 50% interest in the first well in the Uzunlarskaya prospect, Euro- Gas will earn 50% participation in the prospect. EuroGas and Epic expect to spud the first well on the Uzunlarskaya pros- pect-on the southern Kerch Peninsula near the Black Sea coast-this summer.
In addition, EuroGas will secure access to the services of Epic's HHO Ltd. subsidiary, which manages Epic's oil and gas operations in Ukraine. HHO will assume management of EuroGas's Ukrainian oil and gas properties.
Valero's refinery deal
The purchase of El Paso's refinery follows close on the heals of Valero's an- nounced plans last month to acquire Ultramar Diamond Shamrock Corp., San Antonio. (OGJ, May 14, 2001, p. 38). The resulting combined Valero-UDS will double the company's size by merging 23,000 employees, 13 refineries, and 5,000 retail outlets in North America.
Valero entered into 20-year capital leases with purchase options after 2 years for El Paso's Corpus Christi refinery and product logistics system, acquired by El Paso after its acquisition of Houston-based Coastal Corp. earlier this year (OGJ Online, Jan. 29, 2001).
Valero will pay $18.5 million (US)/ year for the first 2 years and have the option to purchase the assets for $294 million at the end of the second year. It has already paid $105 million for inventories and working capital.
Valero plans to invest $52 million over 3 years to integrate the two refineries and increase the combined throughput capacity to 380,000 b/d, making it the fifth-largest US refinery. It also plans to reduce costs, saving $20 million within 3 years.
Bill Greehey, Valero's chairman and CEO said, "The refinery has significant upgrade potential. So we will be investing in strategic projects to fully integrate this refinery into our existing operations, enable it to process heavier feedstocks, increase its throughput capacity, and upgrade its product yields."
About 70% of the refinery's production is light products, including conventional gasoline, diesel, jet fuel, petrochemicals, propane, butane, and light naphthas. The refinery also produces multiple grades of asphalt and petroleum coke.
Among the capital projects planned is one to convert El Paso's underutilized visbreaker unit to process 75,000 b/d of sour crude for resid upgrading in Valero's existing refining system and fully utilizing the aromatic extraction units to recover additional Valero aromatics.
With the transaction, Valero is acquiring the 100,000 b/d Houston Pipeline system, the 20,000 b/d San Antonio Pipeline system, and the 32,000 b/d Valley Pipeline system and associated terminals.
"There are tremendous benefits associated with the logistics system," said Greehey. "These assets are going to be very profitable for Valero, because we're reducing our costs while increasing our income opportunities. The pipeline system provides low-cost access to major US markets, reduces our product transportation costs, and lessens our dependency on marine transportation. The terminals also enhance our marketing flexibility and profitability, because we can increase higher-margin rack sales.
"...We also see several opportunities to enhance the profitability of these assets. There's an opportunity to increase throughput capacity on the Houston line; maximize utilization rates on the other systems; earn third-party tariff revenue on excess capacity; and further develop market opportunities in South Texas," he said.
Analysts' reactions
Three analysts said Valero was making a key strategic move by signing a lease purchase option for El Paso's refinery.
"For all practical purposes, they own the refinery," Fadel Gheit, analyst for Fahnestock & Co. in New York, said of Valero's position on the El Paso refinery. "The driving force is economy of scale."
Gheit predicted that Valero will continue acquiring refineries in coming years until it ends up becoming the largest independent refining company worldwide.
Valero said early last week it expects to earn more than $4/share in the second quarter, up from its initial forecast of $3.25-3.75/share and compared with last year's second quarter earnings of 95¢/share.
For this entire fiscal year, Valero said it expects to earn $10/share.
John Meloy, Simmons & Co. Inter- national Inc. downstream and midstream analyst, praised Valero's acquisition of pipeline assets along with the refinery.
"Strategically, that is an outstanding move for them to get those pipelines. They can send product from Corpus Christi to Houston via pipeline rather than pay a barge," Meloy said.
Valero already was using 65% of the Houston Pipeline System, and now it will cut those pipeline costs 50% by leasing-owning that pipeline, Meloy said.
Louis Gagliardi, John S. Herold Inc. analyst, said Valero will benefit from buying leverage, because it will have two Corpus Christi refineries able to process imported heavy crude.
The pipeline portion of the deal also gives Valero added flexibility, Gagliardi said. "It provides an outlet for their product, and that gives them a lot more marketing potential."
