The tide of consolidations, mergers, and acquisitions continues to ebb and flow within the oil and gas industry. A pair of big mergers tops the list of the latest deals in both the operating and service-supply company sectors:
- 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 early last week.
- Pride International Inc., Houston, and Marine Drilling Cos. Inc., Sugar Land, Tex., are to merge through a $2 billion stock swap into a newly formed Delaware firm that will be the third largest offshore drilling contractor, company officials said.
Conoco purchase
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 tcf of net probable gas reserves to Conoco's North American holdings. It will boost Conoco's North American gas production by 50% to 1.4 bcfd and its net proved reserves by the same percentage to 4.1 tcf, officials said.
Moreover, Gulf Canada holds 4 million acres of undeveloped land in Western Canada, along with a leading position in Canada's frontier exploration region in the Mackenzie Delta.
Company changes
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 Canada has a 72% interest.
Gulf Canada is a member of a producer group studying feasibility of a natural gas pipeline from the Mackenzie Delta in the Canadian Arctic. Conoco hopes to speed the process for that project to move more Canadian gas to US markets, Dunham said. "It will be one of our highest priorities," he said.
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 production of crude, syncrude, and NGL also will more than double, while its North American liquids reserves will more than triple. The deal 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 a 9% interest in Syncrude Canada Ltd., a joint venture that produces and upgrades oil 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 ap- provals and submit to Gulf Canada shareholders a definitive tender offer of $8.02/share cash. That amounts to $12.40 (Can.)/share, or a 35% premium over Gulf Canada's closing price of $9.18 (Can.)/share on May 25, 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 through, Gulf Canada agreed under certain circumstances to pay Conoco a breakup fee of $220 million (Can.)
Pride, Marine merger
The combination of Pride and Marine Drilling will provide the new firm with "economies of scale" in a rapidly improving global drilling market, said company officials. It will especially benefit from the burgeoning US gas market that is stimulating drilling in the Gulf of Mexico, they said. "The merger with Marine Drilling creates a premier global drilling contractor with strong positions in the deepwater markets, in the jack up markets-particularly in the Gulf of Mexico-as well as in the Latin American land market," said Pride International CEO and Pres. Paul A. Bragg.
The deal "combines Pride's operating leverage with Marine Drilling's financial strength to create an extraordinary company with size, geographic scope, and balance sheet flexibility," he said.
Pride International operates a diverse fleet of 305 rigs in more than 20 countries. Marine Drilling has a fleet of 17 mobile offshore rigs, including 1 jack up configured as an accommodation unit in the Gulf of Mexico.
The combined company will have a fleet of 77 offshore rigs, one of the world's largest. That includes 2 drillships, 11 semisubmersibles, 35 jack ups, and a combination of 29 tender-assist, barge, and platform rigs. Six of the floaters are newly constructed and capable of operating in water depths of 5,000 ft or more. The company also operates a fleet of 246 land rigs in international markets.
Merger reasoning, details
"Why now?" asked one analyst of Jan Rask, president and CEO of Marine Drilling, referring to the merger timing. Marine went through financial problems in the early 1990s as the company restructured its debt and let go back about a half-dozen mobile marine rigs that were fi- nanced through loans guaranteed through the US Maritime Administration.
"We have rebuilt the company in the last 4-5 years. This is a tremendous opportunity to increase shareholder value going forward," Rask replied. "It gives us economies of scale in the jack up market in the Gulf of Mexico. That market is the world's largest."
He said, "Pride International is the right partner at the right time. Because of the strong demand for jack up rigs, we are gradually approaching replacement-cost pricing. I can think of no other combination that would result in the upside that Pride and Marine Drilling represent, together with a balanced financial position."
The new company will retain Pride International's name and Houston base.
Stockholders will get one share of stock in the new company for each share held in either of the predecessor companies. Once the merger is completed in the fourth quarter, Pride International stockholders are expected to have 56% of the new firm's 155 million fully diluted shares outstanding.
Robert L. Barbanell, Marine Drilling's current chairman, will be chairman of the new company. Bragg will be president and CEO of the new company. Four members from each of the current companies' boards will be picked to serve on the new firm's board.
