To its makers, this oil-patch merger will create ‘a powerhouse in Canada’

BRIAN BERGMAN February 11 2002


To its makers, this oil-patch merger will create ‘a powerhouse in Canada’

BRIAN BERGMAN February 11 2002



To its makers, this oil-patch merger will create ‘a powerhouse in Canada’


In 2001, more than $35 billion in Canadian oil and gas assets fell into American hands through a series of corporate takeovers, reigniting controversy over the level of foreign ownership in Canadas oil patch. Last week, though, two significant oil plays announced in Calgary bucked

that trend—big-time. Petro-Canada revealed its intention to purchase Germanbased Veba Oil & Gas Gmbh for $3.2 billion. The deal promises to turn Petrocan—market value, $9.5 billion—into Canadas largest integrated oil company (those that have both production and retail operations). But the real blockbuster was the proposed $21-billion marriage of

Alberta Energy Co. Ltd. and PanCanadian Energy Corp. If consummated, the new energy powerhouse, dubbed EnCana Corp., will be the world’s biggest independent oil and gas producer.

Carstairs, Alta., native Gwyn Morgan, 56, currently president and chief executive officer of AEC, will assume the same roles with EnCana. Montreal-born David

O’Brien, 60, former chairman, president and chief executive officer of Canadian Pacific Ltd., and most recently chairman and chief executive of PanCanadian Energy, will be EnCana’s non-executive chairman. In separate interviews last week, the two men discussed what lay behind the merger—and why it matters to Canadians. Excerpts:

Maclean’s: To what degree was this merger driven by a desire to ensure that neither company became a target for a foreign takeover ? Morgan: I think that was a very minor point. At the end of the day, we weren’t being defensive. Our whole attitude was: why shouldn’t we build a powerhouse in Canada? It’s not so much a case of worrying if someone is going to come at us; it’s how can we be so strong that we’ll be able to beat everyone else?

Maclean’s: Some people argue that it doesn’t matter whether oil and gas companies operating in Canada are Canadian-owned. What’s your view?

O’Brien: Head offices are a critical piece of the economic fibre of a country. In a branch-plant economy, all the good jobs go to head offices and the communities where they are located. So when we talk about the brain drain, losing head offices is a huge symbol of that.

Morgan: I think it’s hard to find a Canadian on the street who wouldn’t say it’s great to have some world-class companies based here. How could you be a Canadian if you didn’t feel that way in general? My main thing is that, as a manager of assets on behalf of shareholders, I can’t do it for that reason. But if I can win for the shareholders and also win for Canada, then I feel pretty good.

Maclean’s: What will this merger allow the new entity to do that the two separate companies could not?

Morgan: Well, I think one of the key advantages is our combined assets. AEC is a dominant player in Canada, and so is PanCanadian. We’ve got a very large position in the United States; they have a smaller, but complementary one. We are the largest player in Equador; they are becoming a large player in the North Sea. We have assets in northern Canada; they have assets in eastern Canada. Both of us are looking at multibillion-dollar projects. When you have a larger company, with a larger suite of assets, there isn’t any

one of those projects that is so big that it’s a company maker or breaker.

O’Brien: If you want to get real attention on the stock markets of the world, you have to have a certain size, scale and liquidity. Individually, neither of us were there yet. Combined, we’ll have a better shot. Maclean’s: Does this enable you to effectfurther takeovers?

Morgan: Naturally, that’s a possibility. We’re in a pretty interesting position. There are a lot of our competitiors who recently made big deals, including buying Canadian companies at pretty high prices. A lot of those guys are now selling off their assets


If the EnCana merger goes ahead, the result will be the largest independent energy company in the world. Independents are firms that find and develop petroleum resources as far as the pipeline. The really big companies, known as super-majors, are the global, integrated behemoths that also do refining, run chains of gas stations and often develop renewable energy sources.


Company Country Market value

(in billions)

1. EnCana (proposed) Canada $21.0

2. Anadarko Petroleum U.S. 19.3

3. Unocal U.S. 13.4

4. Burlington Resources U. S. 10.6

5. Apache U.S. 9.6


1. ExxonMobil U.S. $425.2

2. Royal Dutch/Shell Europe 273.3

3. BP Britain 272.7

Source: Peters & Co. Ltd.,CIBC World Markets

because they are over-leveraged. And there aren’t many buyers out there, because most of the people in the business have already blown their wad on their balance sheet. Maclean’s: Some analysts suggest that PanCanadian shares have been undervalued in this merger. What’s your response? O’Brien: It’s funny, analysts do all kinds of calculations. Each of these companies is covered by about 30 analysts across North America. The product of their work and investors’ decisions establishes our share prices. What we did in this case was to take the share price at market value.

Maclean’s: But after the merger announcement, PanCanadians price initially fell. Wasn’t the market sending you a message? O’Brien: That’s not really the case. If you

look at it, news of the merger first leaked out on Jan. 24 and shares of both companies surged on speculation that one was taking over the other. After this marriage of equals was announced on Jan. 27, there was some slippage, but overall both companies moved up in a falling oil and gas market.

Maclean’s: Speaking of falling markets, what in your view is the net effect of the Enron debacle? Are investors spooked?

O’Brien: Yes, it has spooked investors to some degree. If you can’t rely on the financial information issued by certain companies, it creates concern.

Morgan: But there’s also some good news about the competitive free enterpise system in the fallout. Enron was a market maker in terms of connecting energy buyers and sellers. But already, a lot of the other players have picked up the slack. Maclean’s: Getting back to the merger, an intriguing element was the covert negotiations leading up to it, where the whole operation took on code names and you’d check into hotels under aliases. What was that like? O’Brien: Well, there was one recent meeting in a hotel on a Sunday morning where a lawyer got us a room under his name and gave us cards to get in. I was the first to arrive and my card wouldn’t work. I didn’t know where to go. After all, you’re kind of conspicuous in a hotel at 9 a.m. on a Sunday. So I hid out in the men’s washroom for 13 minutes until Gwyn arrived.

Maclean’s: How did the two of you divvy up the executive responsibilities for this new mega-company?

O’Brien: It was really quite easy. I made it clear when I finished at Canadian Pacific that I was going to ride off into the sunset.

I had no desire to be the CEO of this company. Gwyn was prepared to do that, so it fit well.

Maclean’s: Some observers say this merger could still come undone if a third party swoops in and makes an attractive bid for either AEC or PanCanadian. Are you concerned about that?

Morgan: There’s always a possibility. But both David and I have said these companies are not for sale. We are not selling, we are bringing them together. With the current weaknesses in the oil and gas market and in the overall economic situation, this would be a pretty crazy time to sell these companies.