MERGERS, ACQUISITIONS CHANGE FACE OF CANADIAN PETROLEUM INDUSTRY

RENAISSANCE EXPERIENCE

Renaissance Energy Ltd., Calgary, is a textbook example of a company that has achieved a strong balance of stability and fast track growth.

Founded in 1982, Renaissance expanded in the 1990s out of the junior ranks to a senior level producer and predominant driller. A strong land base, employee participation in earnings, successful exploration with low finding costs, and aggressive marketing helped build the company's notable record.

Corporate vital statistics tell the Renaissance story: Between 1990 and 1994 assets quadrupled to $1.65 billion from $412 million, cash flow jumped to $296 million from $86 million, earnings per share doubled, and share price increased from a high of $16.50 in 1990 to a high of $32 last year. Shares recently traded at $29.

While some companies have tested foreign pastures in the search for growth, Renaissance has stuck close to home in Alberta and Saskatchewan as an exploration, production, and marketing company.

Clayton Woitas, Renaissance chairman, president, and chief executive officer, says the company has a strong inventory of undeveloped acreage to sustain its operations for a number of years. The company acquired 3.4 million acres of undeveloped acreage in 1994 to boost its inventory to 6.1 million acres.

Renaissance plans to increase its drilling program this year in western Canada to 1,400 wells from 1,200 in 1994. The program will be split between oil and gas.

Renaissance will cut capital spending by about $260 million to a total of $500 million this year, in part because it spent heavily in 1994 to increase undeveloped leasehold. Woitas says the inventory will ensure continued growth for Renaissance. It spent more than $106 million last year on producing property acquisitions, as well as $178.8 million for lease purchases and retentions.

A key acquisition was the 1992 purchase from Petro-Canada of oil producing leases in the Provost area of Alberta for $35 million that made a significant contribution to Renaissance reserves.

The company won investor support with a strong bottom line performance. Net income increased 29% in 1994 over 1993 to more than $63 million, while operating revenues increased 34% to $426 million. Fidelity Management & Research Co. and Fidelity Management Trust Co., Boston, are the major shareholders in Renaissance with a combined 13.1% interest at the end of 1994.

Renaissance established itself as one of the consistently most active drillers in the Canadian petroleum industry. In 1994, it participated in 1,251 gross (1,218 net) wells with 440 gross (424 net) oil and 329 gross (320 net) gas successes. The company retained a 97% working interest in these wells.

Production totaled 15.7 million bbl of oil and 132.224 bcf of gas in 1994. Proved and probable reserves at yearend 1994 were an estimated 247 million bbl of oil and 1.325 tcf of gas. That compares with reserves of 53.8 million bbl of oil and 629.3 MMcf of gas in 1990. In 1994, additions to oil reserves amounted to a sixfold replacement of production, and additions to gas reserves were a threefold replacement of production.

Renaissance increased its direct oil marketing program in 1994 and now direct markets 90% of its production to refiners in Canada and the U.S.

The company exported 48% of its gas production to U.S. buyers in 1994 with the focus on long-term markets and industrial customers and end users in the cogeneration market.

MORRISON'S GROWTH

Renaissance is only one of dozens of companies that have thrived in the 1990s in the western Canada sedimentary basin.

For example, Morrison Petroleums Ltd. increased production to 14,600 b/d of oil and 40 MMcfd of gas in 1994 from only 3,300 b/d and 2.03 MMcfd in 1990. Proved and probable reserves rose to 22.8 million bbl of hydrocarbon liquids and 147.4 bcf of gas at the end of 1993 from 10.2 million bbl and 46.8 bcf in 1990.

Morrison's corporate history goes back to 1920, when it was formed to operate an Ontario silver mine. It later operated a potash mine in Saskatchewan before entering the oil and gas business in 1977.

The company has made extensive investments in gas processing plants and gathering systems in Alberta. Canadian Gas Gathering Systems Inc. was formed in 1990 with $133 million in funding from Morrison, U.S. investment bankers, and pension funds to acquire gas processing plants and gathering systems and gas reserves in Canada.

Morrison recommends properties for acquisition and manages them when they are purchased.

Morrison Middlefield Resources Ltd., Toronto, recently agreed to buy a British company, IPL Expro (U.K.) Ltd., for $40 million (U.S.).

IPL, a unit of International Petroleum Corp., produces about 2,800 b/d in the U.K.'s East Midlands. Morrison Middlefield plans to drill seven development wells to increase production to 3,000 b/d this year and 4,000 b/d in 1996.

Morrison Petroleums owns 18% of Morrison Middlefield and operates its production in Alberta. The partnership has invested about $75 million in oil and gas reserves. The other major shareholder is the Middlefield Group, a merchant bank with offices in Toronto and London.

Morrison recently acquired Home Oil Ltd.'s 34% interest in North Coleman gas field in the Crowsnest Pass area of Alberta for $27 million. The interest includes about 60 bcf of net proved and probable reserves and more than 32,100 acres of leases.

In all, Morrison has acquired $350 million in assets during the past 5 years but has accumulated only $12 million in long-term debt.

Company Pres. Gordon Stollery expects gas production to double this year and again in 1996. About 75% of Morrison's cash flow comes from oil, but 5 years from now it probably will come three fourths from gas.

Stollery says the company's growth has stemmed from exploring for oil and acquiring natural gas. Now, he says, exploration for oil and gas will be the main thrust for Morrison.

AGGRESSIVE PACK

Strike Energy Inc., Triumph Energy Corp., and Mark Resources Inc. are other companies that have emerged from the junior pack and expanded their potential,

Strike increased its oil production from a mere 35 b/d when it was formed in 1988 to more than 4,380 b/d of oil equivalent at present after a 1994 merger with Battle Creek Developments Ltd.

A key initial move in 1988 was purchase of oil properties in the Tatagwa area of Southeast Saskatchewan that gave the company core property, increased production by 260 b/d and added 3,500 net acres of undeveloped land to its inventory. Infill drilling increased Tatagwa production to 500 b/d.

Strike acquired the assets of United Bison Resources in 1990 and purchased another junior, Sabre West Oil & Gas Ltd., in 1993.

Strike plans this year to drill and operate 59 wells-50 oil and nine gas, including 24 horizontal holes.

It has begun development on its Bolney heavy oil project, about 40 miles northeast of Lloydminster, Sask., with estimated reserves of 100 million W. The project will include 12 horizontal wells, with four completed at the end of June. If initial drilling is successful, 39 additional infill wells could be drilled.

Strike says the Bolney project has the potential to double or triple its production on primary recovery alone. The company holds enough acreage for three more projects of similar size. The ultimate potential of Bolney on primary recovery is estimated at 6,500 b/d with 5,200 b/d net to Strike.

Triumph Energy recently completed a deal for assets that will increase its production to about 1,600 b/d from today's 400 b/d.

The $32 million purchase of 1,200 b/d of light crude production in the Manyberries area of southern Alberta from an undisclosed buyer includes an 81-mile pipeline to move oil from Manyberries to Milk River and a connection with the Bow River Pipeline and crude exports to Montana.

Triumph Pres. Bill Friley says more development drilling is planned.

Mark Resources Ltd. recently acquired Hillcrest Resources Ltd. for $95 million after a takeover battle in which it outbid Numac Energy Inc. for the acquisition,

The deal will increase Mark's production in 1995 to 17,500 b/d from 14,500 b/d and gas production to 86 MMcfd from 71 MMcfd. About 70% of the combined production is oil.

The Hillcrest acquisition is a mark of new corporate health for Mark, which was reporting losses and a $176 million debt load prior to 1993. The company had high operating costs and a mixed exploration record.

Since taking over as president in 1993, Barry Harrison has shucked noncore properties and reduced staff and operating costs. Harrison also served as president of Mark and its predecessor, Bluesky Oil & Gas, from 1981 to 1986 when he returned to a law practice.

Mark forecasts a 20% production growth this year with about $90 million in capital spending and a 90-100 well drilling program.

HEAVY OIL

Increased demand in the U.S. has improved prices and prospects for Canadian heavy oil. And that has spawned opportunities for independent operators.

For example, ELAN Energy Inc. recently made a $126 million deal to buy heavy oil leases at Elk Point, Alta., from Amoco Canada Petroleum Co.

ELAN will acquire 190 sections of land-140 of them undeveloped-with estimated proved reserves of 43 million bbl.

The company plans to increase current production of 7,500 b/d at Elk Point. The acquisition will boost its reserves to 122 million bbl of oil and 100 bcf of gas.

The deal is an example of a junior company profiting by a major selling assets to concentrate on core properties.

Amoco says the sale is not a move away from heavy oil. It plans to concentrate on its core heavy oil holdings in Alberta's Wolf Lake, Primrose, and Wabasca fields.

TALISMAN'S STRATEGY

A combination of acquisitions and successful exploration plays have been the growth strategy for Talisman.

Talisman evolved in the mid-1990s from a former Canadian unit of British Petroleum Co. plc to become one of the larger Canadian independents with considerable exploration success in the gas plays of Northeast British Columbia.

BP Canada sold its mining and oilsands assets as it focused on becoming an upstream player.

Talisman's new name, which became official in January 1993, was chosen from a number of proposals in an employee contest after BP sold its 57% interest in the former BP Canada Inc. on the market.

Successful gas plays in the Monkman and Peace River Arch areas of British Columbia were important to the company's growth. So was the $290 million 1993 acquisition of Encor Inc., a former unit of TransCanada PipeLines Ltd., Calgary. That gave Talisman extensive land holdings in British Columbia and West Central Alberta.

A key growth decision for Talisman was the $1.8 billion (Canadian) takeover of Bow Valley Energy Inc. The 1994 trade included assets in Indonesia and the North Sea.

Talisman obtained major interests in the Central North Sea, which includes the Brae area off the U.K., and the southern gas basin, which includes K/4b and K/5a fields in the Dutch North Sea. To date, 10 oil and gas/condensate discoveries have been drilled on Brae area blocks in which Talisman holds an interest. Five of the discoveries are on production.

Off Netherlands, Talisman acquired Bow Valley's interest in Blocks K/4b and K/5a where two fields were developed in 1992. Production from Permian Rotliegendes sandstone reservoirs began in November 1994. The company has conducted additional development drilling and seismic surveys on the blocks.

North Sea production has added 20,000 b/d of hydrocarbon liquids to Talisman's production. The takeover of Bow Valley almost tripled Talisman assets to $3.2 billion from $1.1 billion. Profits in 1994 more than doubled from 1993.

Talisman has drilled a number of successful tests on the Ogan Komering block in South Sumatra. A development well this year flowed 3,900 b/d of oil, while earlier wells tested 2,450 and 980 b/d, respectively. The company owns a 55% interest with partner state owned Pertamina.

Talisman predicts its Indonesian production will average 17,000 b/d in 1995.

The company also plans exploration programs in Venezuela and Bolivia.

CANOXY JEWEL

CanOxy, 30% owned by Occidental Petroleum Corp., has substantial oil and gas interests in western Canada, South America, the U.S., and North Sea, as well as alternate fuels and chemicals divisions. But the current jewel in the CanOxy crown is the company's highly successful oil development project in Yemen.

CanOxy operates and holds a 52% interest in the 6.8 million-acre Masila block in Yemen. Production began in 1993 with initial flow of 55,000 b/d of oil shipped from a field production terminal completed that year. A production peak of 188,000 b/d was reported in first quarter 1995 with CanOxy earning an average share of 85,000 b/d.

Total company production averaged 125,600 b/d in the first quarter, compared with 109,800 b/d in the same period of 1994. Natural gas production averaged 238 MMcfd in first quarter 1995 vs. 252 MMcfd in the like quarter of 1994.

CanOxy stepped up its international operations this year with new ventures in Romania and Indonesia.

Its 2 Doina well on Block XV off Romania flowed 17.5 MMcfd of gas. Two more wells are planned to test separate structures on the block.

The company took a farmout this year on two production sharing contracts in the Arafura basin of eastern Indonesia. Partners include affiliates of Union Texas Petroleum and Total Petroleum. CanOxy acquired a 26.7% working interest in the Kai and Barakan blocks covering 4.7 million acres and an option to acquire a similar interest in the adjacent Tanimbar and Rebi blocks. The first well will be drilled this summer on the Kai block.

CanOxy also holds exploration interests in the Singtang block of Kalimantan and Block 12W off Viet Nam.

ABACAN IN NIGERIA

Abacan Resources Corp., Calgary, recently attracted international attention and investment capital with a string of exploration successes in the shallow waters of the Niger River delta off Nigeria.

Last May, the company's fourth well flowed 23,070 b/d of light oil and condensate. Three previous wells flowed 8,000, 14,000, and 19,000 b/d, respectively. The reservoir holds estimated reserves of 390 million bbl of oil and 2 tcf of gas.

Abacan will receive 52% of revenues until payout under an agreement with Nigerian partners.

The company is raising money to have a 50,000 b/d production system in place by first quarter 1996. It recently raised $30 million for project development through a private placement of shares to major European institutions.

SUNCOR TURNAROUND

Suncor Inc., which operates three divisions, including a 71,000 b/d oilsands plant at Fort McMurray in northern Alberta, has achieved a strong turnaround from a money-losing position in the early 1990s.

The company, which lost $228 million in 1992, posted a record profit of $121 million in 1994. Suncor and Syncrude have invested heavily in new technology and substantially reduced per barrel production costs to make synthetic oil more competitive with conventional crude.

Suncor's former parent, Sun Co., sold its 55% interest in Suncor this year for $1.2 billion. The government of Ontario sold an interest in 1993.

Suncor currently is spending $250 million to increase its oilsands production to 80,000 b/d by 1998.

Its resources division has replaced an average 190% of its reserves every year for the past 3 years. The company's service station and refinery operations increased profits from $6 million in 1993 to $31 million in 1994. The company is considering spending $100-200 million to acquire oil and gas leases for continued growth.

Suncor also is considering opportunities to focus its oilsands expertise on other areas where such deposits are found-Venezuela, Utah, Madagascar, and Russia, for example.

Suncor Pres. Rick George says, if anything, his company will step up the pace of growth it has achieved in the past 3 years.

GULF CANADA

While Canada's junior and intermediate companies have been in a state of flux, integrated companies have also gone through major changes. They have shed thousands of employees and sold billions of dollars of assets in an effort to increase efficiency and bring core operations into sharper focus.

Gulf Canada Resources Inc., with a substantial debt load and losses totaling $590 million during the past years that included $197 million last year, is under new ownership control and embarking on a corporate turnaround.

J.P. Bryan, founder of Torch Energy Advisors Inc., a Houston investment firm, bought a controlling interest in Gulf this year for $296 million. One of Bryan's moves was a 40% staff cut he believes will save $30 million /year and put Gulf in the black this year.

The company is combining payroll cuts with a policy of acquisitions to improve its production and asset base.

Gulf recently made a $138 million purchase of Mannville Oil & Gas Ltd. and is spending $56 million to acquire acreage and production from Archer Resources Ltd.

Bryan says the Mannville takeover is a prime example of Gulf's western Canada acquisition strategy. It includes production weighted toward gas, extensive development and exploration opportunities, and an acreage inventory that is complementary to Gulf's base.

Mannville produces 3,800 b/d of oil and natural gas liquids and 53 MMcfd of gas. Archer Resources has production of 550 b/d of oil and liquids and 25 MMcfd of gas.

The Archer deal would give Gulf about 240,000 acres of land. Gulf also will pay Archer $3 million for a 50% interest in another 74,000 acres in East Central Alberta.

Gulf withdrew this year from a joint venture oil operation in Russia in the first move by the new management. The company sold its 25%, interest in the KomiArcticOil project to British Gas Exploration & Production Ltd. for an undisclosed price.

Gulf said the operation, which produced 16,000 b/d, was not a core asset. Funds from the sale will be used for core activities in western Canada or in Indonesia, where it recently reported a 36.5 MMcfd gas discovery on the Corridor block.

PETRO-CANADA

Petro-Canada, owned 70% by the Ottawa government, was a consistent money loser until 1992, when it changed management and implemented major cost reductions. The company recorded a $598 million loss in 1991, and accumulated debt was about $2 billion. The following year it recorded a slim profit of $9 million after cutting operating costs by $306 million and reducing debt by $695 million to a total of $954 million.

Petro-Canada earned a $160 million profit in 1993 and increased that by 64% to $262 million in 1994. The federal government is considering selling some or all of its remaining 70% interest in the company.

Petro-Canada improved its financial performance through a series of staff cuts, more efficient operations, and disposal of noncore assets. That included sale in 1994 for $156 million of TroCana Resources, a 6,500 b/d oil junior created as a vehicle to hold the parent company's noncore assets, including 85 properties in western Canada.

Petro-Canada also closed several refineries and hundreds of service stations and cut downstream spending by more than 15%.

Despite the record profit in 1994, Petro-Canada's chief executive, Jim Stanford, says the company must continue to trim costs. A further staff reduction of as many as 700 workers was disclosed at the annual meeting in May The latest cut will cost about $52 million to implement and create a first quarter loss of $8 million. But it wilt yield savings of $40 million/year.

Stanford says the company's return of only 6% on capital employed in 1994 will have to be increased to at least 10.5%, the company's cost of capital. He says Petro-Canada will have to improve its performance to attract investors when Ottawa decides to sell its interest.

Petro-Canada looks to its 25% interest in development of Hibernia oil field off Newfoundland as a future source of significant reserves and production increases. The company expects Hibernia toward the end of the decade to add reserves of 154 million bbl of crude and production of 31,000 b/d. It also sees Hibernia as a catalyst for other field development projects off Canada's east coast in which Petro-Canada owns interests. These include Terra Nova field on the Grand Banks off Newfoundland.

LARGE COMPANIES

Almost every major company in the petroleum industry-Shell Canada Ltd., Chevron Canada Resources Ltd., Norcen Energy Resources Ltd., Imperial Oil Ltd., and Amoco Canada Petroleum Ltd., for example-have gone through a similar process of downsizing and rationalization of assets in the past decade.

And just to prove takeovers have not gone out of style, Amoco Canada, a unit of Amoco Corp., is in the midst of a bid for Home Oil Ltd., a veteran company in the Canadian petroleum industry- Home is seeking other buyers to improve the Amoco offer of $16.50/share, or $757 million and assumption of Home debt that would increase the offer to more than $1 billion. Amoco's offer is tied to receipt of 90% of Home shares.

Home produces 23,500 b/d of oil and 240 MMcfd of gas. Amoco produces 59,000 b/d of oil and 821 MMcfd of gas and ranks as Canada's biggest gas producer.

Outcome of the Amoco bid will be decided this summer.

Copyright 1995 Oil & Gas Journal. All Rights Reserved.