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Petrovera deal is a win-win for all parties

There's more to last week's Petrovera Resources deal than meets the eye.

For one thing, it's not often four big players come together in one transaction. The last time it happened the deal involved Husky Energy and its $588-million (U.S.) purchase of USX Marathon's Canadian assets, of which 28 per cent were immediately sold to EOG Resources for a princely sum. Last week's example saw a $701-million (Canadian) deal involving EnCana Corp., ConocoPhillips, Canadian Natural Resources and PennWest Petroleum.

But the multiparty transaction was interesting for reasons other than size and length of time that has elapsed since a company fetched a handsome price for its assets.

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Petrovera was created in the pre-merger frenzy, when PanCanadian was still 81-per-cent owned by CP Ltd. and Gulf Canada hadn't disappeared into the corporate structure of Conoco (before the Phillips deal).

Both companies contributed heavy oil assets that were acknowledged to be costly from an operating standpoint into Petrovera in June, 1999, at a time when oil prices were hovering close to $18 (U.S.) per barrel.

The company was structured with what is known as a "shotgun" clause where either side could make an offer to the other for their piece at any time. For example, EnCana could offer to buy ConocoPhillips' interest but at the same time, ConocoPhillips could turn around and say they would buy EnCana's portion at that same price. In other words, the shotgun clause results in a bit of nail-biting poker. In this case, EnCana did bid ConocoPhillips for its 47-per-cent stake in Petrovera but only after it had struck a deal with Canadian Natural Resources.

Had ConocoPhillips said they wanted EnCana's stake instead and ended up with the entire company, it's questionable the sale to Canadian Natural and PennWest would have happened.

And the reason for EnCana triggering the shotgun clause was simply that ConocoPhillips was the operator of the properties and it's tough to sell any company non-operated assets.

This is especially true if the buyer is a company associated with Murray Edwards.

Mr. Edwards, who is closely associated with both Canadian Natural and PennWest, is known for not wanting to pay too much for acquisitions nor does he like buying assets that aren't operated because then cost control is out of reach.

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In this case, as far as Canadian Natural is concerned, the price for the 30,530 barrels a day of production works out to $15,296 per flowing barrel of oil -- fair value given these are heavy oil assets but cheap compared with the sale of natural gas producer Ice Energy to Enerplus that went for close to $60,000 per flowing barrel back in November.

It might sound a bit trite, but this is one of those transactions that qualifies as a "win-win" for all parties.

It's no secret that EnCana has been on a mission to sell its non-core, non-operated properties. A year ago EnCana sold its 10-per-cent stake in Syncrude for $1-billion and in November of 2002 it unloaded the Express Pipeline and its 70-per-cent interest in the Cold Lake pipeline system for total proceeds of $1.6-billion.

Gulf Canada, under the leadership of Dick Auchinleck, wanted to sell its Petrovera share as far back as 2000 and use the proceeds to pay down debt.

For Petrovera, this is the best possible outcome.

Here was a company created by two companies that no longer existed; the current ownership apparently could seem to agree on how to proceed with developing the assets and that left the company's management at loose ends.

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That said, say analysts, Petrovera's management did an exceptional job in the absence of meaningful direction from either side.

Now it's in the hands of experienced operators who have definite ideas on how to extract value from the asset base at a time when the commodity cycle is making heavy oil a lucrative business.

What unfolded last week was a typical "Murray" deal; a bid for assets at fair value, with the assets strategically split out between Canadian Natural and PennWest.

Canadian Natural adds 27,500 barrels per day of production and 9 million cubic feet per day of natural gas while PennWest gets daily production of 10,000 barrels of oil equivalent and 400,000 acres of land in south-central Saskatchewan. If anything, this deal illustrates the need for companies to keep looking for acquisitions that offer growth because it's getting harder and harder to do that by just using the drill bit.

"As a general rule a company acquires to grow and drills to stay flat. If you don't acquire, there isn't enough growth," said Brian Prokop of Peters & Co.

It all looks a bit like a carbon copy of the $1.6-billion deal Mr. Edwards struck during Stampede Week of 1999 involving the purchase of assets from BP Amoco. Back then there were some critics suggesting that because Mr. Edwards circumvented the bidding process by lobbing in a pre-emptive bid, he paid too much.

There might be a few folks out there saying too much was paid last week for assets that are not ranked at the top of the list.

But, as one analyst said Friday, ultimately everything Canadian Natural does looks like a bargain.

And it's probably not the last of its kind that will see Mr. Edwards' fingerprints all over it.

dyedlin@globeandmail.ca

Report on Business Company Snapshots are available for:
CANADIAN NATURAL RESOURCES LIMITED PENN WEST PETROLEUM LTD.
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