COMPANY NEWS: Canadian oil and gas M&A activity continues unabated

Dec. 11, 2000
Merger and acquisition activity involving Canadian oil and gas companies continues unabated.

Merger and acquisition activity involving Canadian oil and gas companies continues unabated. Meanwhile, other companies are reassessing and restructuring their assets.

In the latest flurry of M&A action involving Canadian firms:

  • ARC Energy Trust said it will acquire Startech Energy Inc. in a $485 million (Can.) takeover deal.
  • Vintage Petroleum Inc., Tulsa, will acquire Calgary-based exploration company Cometra Energy (Canada) Ltd. from Electrafina-which is part of Groupe Brussels Lambert SA-for $46.3 million (US) cash.
  • Ultra Holdings Inc. (UHI), Vancouver, said it will vote against Ultra Petroleum Corp.'s proposed acquisition of Houston-based Pendaries Petroleum Ltd. at a general shareholders meeting to be held Dec. 15. UHI cited concerns about funding Pendaries's Chinese project in addition to Ultra's existing Wyoming Green River basin undertakings.

In other company news:

Tracer Petroleum Corp., Calgary, resolved to split its operations into two wholly owned business units. One will continue Tracer's upstream operations overseas, and the other will hold Tracer's petroleum trading rights in Iran and elsewhere. Tracer is also pondering a spinoff of the trading company.

Houston-based Frontera Resources Corp. completed the largest onshore financial package for oil and gas development in the Caucasus with a $50 million (US) loan from the European Bank for Reconstruction and Development (EBRD).

Kaneb Services Inc., Dallas, will distribute its pipeline, terminaling, and product marketing business to its shareholders as a limited liability company. Shareholders will retain their stake in Kaneb Services' technology and technical services businesses.

ARC-Startech deal

In its deal to acquire Startech, ARC will pay 0.96 of a unit, or about $10.90 (Can.), for each Startech share and will assume $145 million in Startech debt.

Startech produces about 10,000 b/d of crude oil and 35 MMcfd of gas in Alberta and Saskatchewan. The acquisition-already approved by the Startech board-will increase ARC production by about 58% to 36,715 boe/d.

ARC said the purchase will increase its distributions by 15% and lower operating costs by 10% on its properties in Western Canada. Both are Calgary firms.

Energy trusts such as ARC have been involved in more than $1.6 billion in acquisitions and takeovers in 2000 in Canada, including a $350 million offer late last month by EnerMark Income Fund for Cabre Exploration Ltd. (OGJ, Nov. 20, 2000, p. 34).

Penngrowth Energy Trust said Dec. 1 that it had closed a $128 million deal with Canadian Natural Resources Ltd. for six oil and gas properties.

Other companies acquired by trusts in 2000 include: Venator Petroleum Co. Ltd., Raider Resources Ltd., Draig Energy Ltd., Western Star Exploration Ltd., Pursuit Resources Corp., and EBOC Energy Ltd.

Vintage acquisition

Upon completion of its acquisition of Cometra Energy, Vintage intends to spend $6.5 million (US) in 2001 on exploration and development projects arising from the purchase, mostly in Canada. The company will also drill three wells in southern Trinidad.

Cometra has operations in Western Canada and Trinidad and Tobago; owns 13 producing fields in the provinces of Alberta, British Columbia, and Saskatchewan; and holds 146,000 undeveloped acres. Vintage-which has operations in the US, Argentina, Bolivia, and Ecuador-says that it will operate half of the newly acquired wells, which are currently producing 2,670 boe/d net to Vintage.

"With our new Canadian team and attendant exploration prospects in place, we have taken an important step toward expanding our North American exploration effort as well as created a springboard for additional acquisitions," said S. Craig George, Vintage CEO.

The effective date of the acquisition was Sept. 1.

Ultra-Pendaries merger holdup

Ultra Petroleum, Houston, agreed in October to acquire the company through a stock swap that would leave Pendaries shareholders owning 21% of Ultra (OGJ Online, Oct. 18, 2000).

The offer calls for Ultra to issue 1.58 shares of its common stock for each share of Pendaries common stock. If the deal is completed, Pendaries will become a wholly owned subsidiary of Ultra.

In addition, Ultra provided a $5 million line of credit to Pendaries' subsidiary, Sino-American Energy Corp. Ultra's exploration and production focus is on the Green River basin area of Wyoming, while Pendaries focuses its E&P on China.

UHI said the proposed acquisition cost will be insufficient to cover the estimated capital expenditures of $90 million (US) or more needed to develop Pendaries's Block 05/36 in China's Bohai Bay. Pendaries holds a 15% interest in the block through its Sino-American Energy subsidiary.

UHI said the cost would prevent Ultra from developing its existing interest in Wyoming's Green River basin and identifying and developing additional natural gas interests in North America. UHI also noted that Bohai production is unlikely to come online before 2003 and expressed concern over the companies' diverse E&P focus areas of North America and China.

UHI owns 13,230,600 shares, or 23%, of the issued and outstanding Ultra shares.

Tracer spinoff

The first of Tracer's spunoff entities, which will be called Tracer Exploration & Production Co. (TEPCO), will own all of Tracer's current and future rights to upstream exploration and development projects in Indonesia, Kazakhstan, and Iran. TEPCO, which will be registered in Bermuda, will acquire and develop petroleum project interests in Iran and the Caspian Sea region.

Tracer's other business unit, Tracer Trading Ltd. (TTL), will sell the oil, natural gas, and condensate that TEPCO produces. TTL also will be registered in Bermuda. It will hold all of Tracer's rights to crude swaps and petroleum trading. Initially, TTL will undertake trading with major commodity trading firms. The company said it is working on seven trading transactions involving Iran.

TTL also will assist other companies with procuring petroleum-related goods and services from Western companies.

TTL's operating offices will be in Geneva, Bermuda, and Tehran; it may also open offices in London, Dubai, and Singapore. A Tracer statement said a possible TTL spinoff could be achieved by a special dividend.

Frontera financing

Frontera's loan is the second phase of a $60 million package initiated in June for development of the Kursange and Karabag* oil fields in Azerbaijan and for Block 12 in eastern Georgia. The first $10 million was a convertible loan that the EBRD may convert into an equity investment in Frontera's stock (OGJ, June 19, 2000, p. 32).

(ERBD was established in 1991 to aid the transition from central to market economies in Central and Eastern Europe, and in the former Soviet states.)

Frontera, a privately held independent, was formed 5 years ago to develop oil and gas in emerging international markets. One of its founders was the late Constantine Nicandros, longtime chief executive of Conoco Inc. His son, Steve Nicandros, is president and CEO of Frontera.

"Our strategy is to grow the company through land operations in the Black Sea region. That has been our primary area of focus," he told OGJ in a telephone interview from London.

Frontera's "second footprint" will be in the Middle East, "around the Mediterranean and the North Africa rim and in the [Persian] Gulf states," Nicandros said. "We focus on low-cost operations to produce oil and gas for regional markets."

Frontera began operating in Georgia nearly 4 years ago and moved into Azerbaijan last year, following the Kura basin play from eastern Georgia that extends off Azerbaijan. In the process, it helped assemble the largest onshore acreage position in the Caucasus region, more than 1.4 million acres.

"We're the largest onshore player in the area," Nicandros said.

The company has 30% interest in 116,000 acres in Azerbaijan, which includes the giant Kursange and Karabag* fields that produce high-quality oil. Partners in that operation include the State Oil Co. of Azerbaijan (SOCAR) and Delta/Hess (K&K) Ltd., a joint venture of Amerada Hess Corp. and Delta Oil Central Asia Ltd.

Production from the Azerbaijan properties has more than doubled from the 2,800 b/d level when Frontera moved into that area a year ago. With the additional infusion of cash, Nicandros expects another increase of similar magnitude "in the next year or two."

Block 12 includes 1.3 million acres with seven known fields and "numerous" exploration prospects. Included among those properties is Taribani field, the first of Frontera's development projects, which contains gross unrisked reserves estimated at 1 billion boe.

Frontera has 100% of the foreign company operating interest in a production-sharing agreement, in partnership with Georgia's state oil firm, Saknavtobi. It is continuing an aggressive drilling program in that area.

The smaller, low-risk land operations by Frontera and other independents in the former Soviet states haven't drawn as much attention as the big, high-dollar offshore projects that the majors are pursuing in the Caspian area. However, some analysts say the independents exercise more control over their projects and can manage their risks more effectively (OGJ, July 24, 2000, p. 40).

Apart from Frontera's successful performance, EBRD executives also cited another reason for their "landmark" loan. "Frontera's approach has provided a strong focus on utilization of local strengths in both countries, thereby greatly contributing to the regional economic development and growth," said Peter Reiniger, director of EBRD's industry and commerce business group.

"We find the best and brightest of the national workforce and invest in them," said Nicandros. Capitalizing the talents of local workers who know the regional geology and performance history, he said, gives Frontera a competitive edge over other producers "who tell local workers, 'Step aside while we show you how we do it in Texas and Oklahoma.'"

EBRD is owned by 61 shareholders that include 60 countries, the European Investment Bank, and the European Community, officials said. It operates with 20 billion euros in authorized capital.

Kaneb's LLC

Kaneb Services' limited liability company will own the general partner interest and 5.1 million limited partner units of Kaneb Pipe Line Partners LP that Kaneb Services now owns, plus Kaneb Services' wholly owned petroleum product marketing subsidiary.

President and CEO John R. Barnes said, "We have elected to create this entity in the form of an LLC, which will be treated as a partnership for federal income tax purposes."

A Kaneb statement said the planned distribution of pro rata shares in the new company will be taxed at the capital gains rate, and the rate will apply only to part of the value distributed to shareholders.

Kaneb intends to complete the action by midyear 2001 and plans to apply for a listing on the New York Stock Exchange for the new company.