MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING MONDAY, JANUARY 26, 1998 (4)
TCPL & NOVA ARTICLES, CON'T
Alberta Energy Minister Steve West said on Monday he was in favor of a planned C$14-billion merger of natural gas pipeline firms NOVA Corp and TransCanada PipeLines Ltd, saying it was in the province's best interest.
"From my position as a minister, knowing about the global marketplace that exists in this product called gas and other products, I'm supportive of this merger," West told Reuters in a telephone interview from the provincial capital of Edmonton.
"This is an evolution that probably is in the best interests of Alberta."
Since becoming energy minister last spring, West has from time to time waded into competitive issues involving NOVA, including the battle between the company and backers of the proposed Canada-Chicago Alliance Pipeline project.
NOVA was established as the Alberta Gas Trunk Line by the provincial government in the 1950s, although Alberta no longer has an equity interest in the company.
West said, however, that he was unable to comment on how he believed the Alberta Energy and Utilities Board, the provincial regulator, would rule on the deal, which was announced on Monday.
The AEUB and the provincial cabinet must approve the transfer of ownership in NOVA Alberta gas pipeline unit NOVA Gas Transmission Ltd to the merged TransCanada.
"I won't speak for the EUB. They make those decisions -- that's their job," he said.
TransCanada and NOVA said they agreed to merge in an all-share deal to create North America's fourth largest natural gas pipeline and oil and gas trading company.
The combined entity would split into separate energy and chemical businesses with combined revenues of C$16 billion ($11 billion) and C$21 billion ($14.5 billion) in assets.
Alberta Premier Ralph Klein also said the deal had his government's blessing.
Speaking to reporters in Edmonton, Klein said he discussed the deal with TransCanada Chief Executive George Watson during a trade mission to Latin America last week and with NOVA CEO Ted Newall at the premier's home in Calgary on Sunday.
"The explanation is perfectly reasonable," Klein said. "They want to become global market players, and they have to have the strength because they're competing with very large American companies -- Enron being one example."
Klein said he was reassured that the merger would not result in major job losses and that it would not be harmful to competition in energy markets.
He also said he had been given indications that "things might get warmer""between the existing pipelines and Alliance proponents, "that the opposition might not be as aggressive as it was under the old situation."
TransCanada, Nova and Units' Ratings Affirmed by Standard & Poor's
Standard & Poor's today affirmed its ratings on TransCanada PipeLines Ltd. and Nova Corp. and its subsidiaries Nova Gas Transmission Ltd. and Nova Chemicals Ltd. (see list below). This follows the announcement today that the two Canadian entities plan to merge in a stock for stock transaction valued at about C$7.3 billion ($5.4 billion). Consummation of the merger is expected, although the regulatory approval process will likely take up to six months.
The business profile of both TransCanada and Nova Corp.'s natural gas pipelines are the two best in North America. Combining these two companies strengthens even further their dominant market positions and should enhance their ability to compete against new pipeline proposals. However, weak financial profiles exist at both pipeline units, due in part to very low 30% authorized common equity layers and heavy annual capital spending requirements. While synergies could provide C$150 million in annual savings, the merger is not expected to significantly alter the combined debt service coverage ratios. Also, since the credit profile of Nova's chemical business can stand on its own, its planned public spin-off -- concurrent with the close of this merger -- will not affect the existing ratings of the pipelines. Very strong qualitative credit fundamentals of the two Canadian pipelines is supported by access to ample and low-cost Alberta gas supplies, healthy domestic and U.S. demand (providing a low cost alternate supply source for U.S. utilities and marketers), supportive regulation by both the Alberta Energy Utilities Board (Nova) and National Energy Board (TransCanada), and virtually no pipeline competition. Importantly, with existing incentive regulations, some of the cost savings from synergies that emerge from operating the pipelines together can be retained. This would help offset some of the tariff discounting that Nova Gas Transmission has had to employ to satisfy Alberta gas producers. Still, both pipelines employ different rate structures, and management could be challenged to fold Nova Gas Transmission into the National Energy Board environment.
Cash needs at the combined new entity will be significant as large investments to satisfy U.S. demands and increase pipeline capacity on both systems are expected to continue, as will outlays for gas gathering and processing and international energy projects. Both TransCanada and Nova have sizable and relatively complimentary energy investments in South America. Although nonregulated investments are expected to be conservatively financed, greater cash flows are also expected to offset increased business risk.
OUTLOOK: STABLE
Stable outlooks at both TransCanada and Nova anticipate steady earnings and cash flow performance from their pipeline units, supported by domestic and U.S. growth prospects. Management is expected to conservatively finance investments and acquisitions in various worldwide energy projects primarily with internal cash or common stock. Yet, financial targets for existing ratings will get tougher as the portfolio of nonregulated investments grows larger. The anticipated spin-off of Nova's highly cyclical petrochemical business further adds to ratings stability.
RATINGS AFFIRMED
TransCanada PipeLines Ltd.
Corporate credit rating A-
Senior unsecured debt A-
Subordinate debt BBB+
Preferred stock BBB+
TransCanada Capital
Corporate credit rating A-
Preferred stock BBB+
Nova Corp.
Corporate credit rating BBB+
Nova Gas Transmission Ltd.
Corporate credit rating A-
Senior unsecured debt A-
Nova Chemicals Ltd.
Corporate credit rating BBB+
Senior unsecured BBB+
TOP STORY
UPR Grabs Norcen In All-Cash, $3.7B Transaction
Ian McKinnon The Financial Post
The $3.7-billion sale of Norcen Energy Resources Ltd. to a U.S. company is unlikely to be the last as firms south of the border position themselves for an anticipated improvement in Canadian natural gas prices.
Union Pacific Resources Group Inc. yesterday announced a cash bid of $19.80 a share for all Norcen's 187 million shares.
UPR will assume Norcen's outstanding net debt of US$900 million, pushing the agreement's total value to $5 billion.
The gap between Canadian and U.S. gas prices, currently almost US$1 a thousand cubic feet, is expected to narrow later this year and in 1999 as new pipelines come onstream, said Tyler Dann, a vice-president with Cr‚dit Suisse First Boston.
"Other American companies may see this as a signal that Canadian assets can be purchased for the right price," the Houston-based analyst said.
Pioneer Natural Resources Co., which agreed last fall to buy Chauvco Resources Ltd.'s Canadian and Argentine assets, and Apache Corp. could be possible buyers for energy firms north of the border, he said.
Norcen wasn't cheap. The price was about 7.5 times unlevered cash flow compared with its five-year trading average of 6.1, Dann said.
"They did right by their shareholders. I'm sure the auction, if you will, was well attended and UPR did not steal the company," he added.
Norcen president and chief executive Grant Billing said he was pleased with the deal since UPR intends to keep most of Norcen's 1,200 workers, including a Calgary headquarters for Canadian operations.
The price, a 29% premium to Norcen's close of $15.30 Friday, should appeal to shareholders, he said.
"It's an all-cash transaction. It's a very attractive price. It's clean, simple and very straight forward."
Norcen shares (NCN/TSE) closed yesterday at $19.45, up $4.15. UPR (UNP/NYSE) ended at US$58 1/4, up 1/4.
The door is not shut on another bidder, but the break fee of $125 million, plus Noranda's Inc.'s irrevocable commitment of its 49.5% stake in Norcen to UPR, will be difficult hurdles to clear, Billing said.
Noranda's share of the sale will amount to $1.83 billion. It will record a $590-million after-tax gain from the sale. The money will be used to expand its mining, smelting and refining operations. It had held its stake in Norcen for 10 years.
Last night some analysts speculated Noranda could use some of the proceeds to buy base metal miner Rio Algom Ltd.
The sale is part of Noranda's strategy to exit the forestry and energy sectors to concentrate on mining.
The offer to Norcen investors will be initiated soon and the tender period will last 30 days. The transaction is subject to regulatory approval in both countries.
The purchase of one of the country's largest producers is a return to the past in some ways for Union Pacific, which largely abandoned Canada in the early 1990s.
It left Canada because it did not like its then asset base, which consisted of small stakes in in a number of properties, chairman and chief executive Jack Messman said.
Norcen has 10 core properties with a high degree of control, plus substantial exploration and development drilling potential on five million net acres of land, he said during a conference call.
The company looked at several firms in Canada and Latin America before selecting Norcen.
"In Norcen we think we have found what we have been looking for," Messman said.
UPR plans to sell assets worth US$500 million to US$700 million to cut its debt, but Norcen's heavy oil properties are not expected to go on the block, he said. The company produces 20,000 barrels a day of heavy oil.
Besides assets in Western Canada, which will account for 25% of the merged firm's production, properties in the Gulf of Mexico, Guatemala and Venezuela were other attractions.
Deep-water developments in the Gulf of Mexico, where Norcen has two discoveries, plus a commitment for deep-drilling rig time were particularly desirable, Dann said.
Union Pacific paid $5.63 a barrel of oil equivalent for Norcen's proved reserves.
UPR Plans $500-700 Million In Asset Sales
Union Pacific Resources Group Inc said it would sell $500-$700 million of assets to reduce its debt to equity ratio after its proposed acquisition of Canada's Norcen Energy Resources Ltd (NCN.TO).
UPR, which will initiate a public tender for Norcen this week, will see its debt to equity ratio rise to 73 percent from around 40 percent after the acquisition, chief executive Jack Messman told a conference call.
Messman added that Norcen's heavy oil assets would not be among those sold, despite the fact that UPR has no experience with heavy oil output.
He added that there were no immediate plans for equity sales to reduce debt, especially with oil and gas shares at their current depressed levels.
Although the acquisition will reduce UPR's dependence on short-life reserves in the Austin Chalk from 33 percent of UPR's current assets to 20 percent of the reduced company, Messman said that was not the prime purpose of the deal.
The need to replace production from the Chalk was cited by Pennzoil Co (PZL) in its defense against UPR's hostile bid for the company, which lapsed last year and had also been criticised by some analysts.
''The Chalk is very good... sure it does deplete very quickly,'' said Messman, who said UPR would invest $400 million in the Chalk this year and would increase production from the formation by 5.0 percent in 1998.
UPR's stock was off slightly after the deal was announced, trading 1/4 lower to 23-1/4 on a day when other energy related shares firmed. Norcen added C$4.10 to C$19.40.
UPR said earlier that while the acquisition, which will cost $2.6 billion in cash for Norcen equity plus $900 million in debt, would cut 1998 analyst forecasts of earnings per share for the company by 60-70 percent, it would increase cash flow per share by 25-30 percent a year.
Analysts are looking for EPS of $1.38 for 1998, according to First Call.
Asked whether the 29 percent premium UPR is paying for Norcen represented a rather heady multiple, Messman said that Canadian energy stocks had sold off heavily and share prices no longer reflected the true economic value of assets.
UPR is paying $5.63 per barrel of oil equivalent proven reserves in the deal, which will reduce its dependency on natural gas to 58 percent of production from 69 percent.
The deal also extends Union Pacific's reserve to production ratio from 6.8 years to 7.9 years.
Messman said that UPR's capital budget would be $1.6 billion in 1998 and Norcen would probably spend $500 million.
UPR's spending plans are based on $2.00 per thousand cubic feet for gas and oil at $18.00-$20.00 per barrel compared with a $16.00 current price for the benchmark West Texas Intermediate blend.
''Nothing cures low prices like low prices,'' said Messman when asked if current prices would cause UPR to reduce its capital spending plans.
AS REPORTED BY THE GLOBE & MAIL
Union Pacific To Buy Norcen
U.S. Giant Offers $3.7-Billion Cash For Energy Firm
Noranda agrees to tender 49.5% stake
Tuesday, January 27, 1998
By Allan Robinson Mining Reporter
Union Pacific Resources Group Inc. of Fort Worth, Tex., has agreed to acquire Norcen Energy Resources Ltd. -- one of Canada's premier oil and gas exploration companies -- in an all-cash bid worth $3.7 billion.
Toronto-based Noranda Inc. said it has "irrevocably agreed" to tender its 49.5 percent stake in Calgary based Norcen toUnion Pacific. The transaction will boost Noranda's cash reserves by $1.8 billion, to about $2 billion, and result in an after-taxgain of $590 million.
The boards of directors at both Norcen and Union Pacific have agreed to the takeover. Norcen also has agreed "in certain circumstances" to pay Union Pacific a non-completion fee of $125-million should the deal not go ahead.
Union Pacific said it plans to finance the cash offer, which will be open for 30 days, with bank loans from Chase Manhattan Bank NA and Bank of Montreal. To help pay for it, Union Pacific plans to sell off between $500-million (U.S.) and $700-million in assets over the next two to three years and possibly raise equity through a sale of shares, chairman Jack Messman said yesterday.
"That has been one of the characteristics of U.S. oil and gas companies," said Wilfred Gobert, an analyst with Peters & Co. "They [the companies and investors] show a much greater willingness to use financial leverage" compared with Canadians.
The sale of the Norcen stake marks the first step in Noranda's plan to transform itself from a natural resources conglomerate with interests in oil and gas, forest products and mining to a focused international mining and metallurgical company.
"We will be investing the money in the metal businesses that we are in and in new metals businesses we will be growing," said David Kerr, Noranda's president.
Noranda executives have said that they would like to increase the company's 46 percent stake in nickel miner Falconbridge Ltd. Yesterday, shares of Toronto based Falconbridge rose 5 cents to $18.05 (Canadian) a share, which is off from its 52-week high of $33 last March.
This year, Noranda still plans to spin off wholly-owned Canadian Hunter Exploration Ltd., an oil and gas producer, and 66-per-cent owned Noranda Forest Inc. as a dividend to Noranda shareholders, Mr. Kerr said.
Union Pacific is one of the most aggressive oil and gas exploration companies in the United States. It ranked as the No. 1 domestic driller in 1997 for the sixth consecutive year and it plans to spend $1.4-billion (U.S.) on exploration and production this year.
Union Pacific is buying Norcen after its hostile $6.4-billion takeover bid for Pennzoil Co. of Houston was rejected last November by Pennzoil's board of directors. "Norcen was always high on the list of companies that we found attractive," Union Pacific's Mr. Messman said.
Norcen shares rose $4.15 (Canadian) to $19.45 on the Toronto Stock Exchange in response to Union Pacific's $19.80-a-share bid. Norcen has 187 million shares outstanding and $900-million in debt.
"When it comes to good quality assets, the price doesn't vary much between a weak market and a strong market," Mr. Kerr said. Oil and gas companies have recently dropped in price because of lower oil prices. Noranda shares rose 40 cents yesterday to $25.10 a share on the TSE.
The Norcen acquisition will result in a "North American mega-independent" oil and gas producer with significant Latin American exploration opportunities, Mr. Messman said.
The corporate cultures of Union Pacific and Norcen are similar and there is not much overlap in exploration activities, Mr. Messman said. As a result, there is little duplication of activities so that Western Canadian operations, which will remain headquartered in Calgary, should remain largely unaffected, he said.
"We are both companies that want to grow through the drill bit," said Norcen president Grant Billing, adding that Norcen has been a leader in expanding its business outside of North America. Currently, only 52 per cent of its assets are in Western Canada and 48 per cent are outside of Canada, in places such as Venezuela, Argentina, offshore Australia and Guatemala.
Norcen also has heavy oil assets in Western Canada, which will be carefully evaluated, Mr. Messman said.
Mr. Billing, 46, said that he has given no thought to his future role with the new company.
Union Pacific estimates that the Norcen acquisition will increase its 1998 revenue by 42 per cent to $2.7-billion (U.S.) in 1998, up from $1.9-billion in 1997. Its shares rose 12 cents yesterday to $23.62 on the New York Stock Exchange.
Union Pacific said Norcen will make it a significant player in both Western Canada and the Gulf of Mexico, especially in the deep water areas, where until now Union Pacific has only had limited exposure. Union Pacific has mainly explored in the United States.
Investor impact
With the sale of its stake in Norcen, Noranda pockets $590-million and begins the process of transforming itself into a company that concentrates on mining and metallurgy. Norcen is expected to remain largely unaffected as there is little overlap between its operations and those of Union Pacific.
NCN-TSE 52wk HI $20 52wk LO $13.50 Close yesterday $19.45, up $4.15.
NOR-TSE 52wk HI $33.40 52wk LO $21.90 Close yesterday $25.10, up $0.40.
Union Pacific Resources on S&PWatch, Negative; Norcen Watch, Positive
Standard & Poor's today placed its single-'A' corporate credit and senior debt ratings, 'A-1' commercial paper and short-term corporate credit ratings, and preliminary single-'A'/single- 'A'-minus/single-'A'-minus senior/subordinated/preferred stock shelf registration ratings of Union Pacific Resources Group Inc. (UPR) on CreditWatch with negative implications.
In addition, the triple-'B' corporate credit and senior debt ratings of Norcen Energy Resources Ltd. remain on CreditWatch, however, the implications have been revised to positive from developing. This follows UPR's announcement that it has offered to acquire all of the outstanding shares of Norcen in a $2.6 billion all-cash bid. Included in the transaction is an irrevocable commitment by parent company Noranda Inc. (triple-'B'/Stable/--) to tender its 49.5% interest in Norcen to UPR, ensuring that UPR can gain effective control of Norcen. Given, at least initially, that about $2.6 billion of incremental debt will be associated with this transaction, plus the $900 million of Norcen debt which would be assumed by UPR, UPR's debt leverage would increase significantly. However, management is expected to take actions to restore much of its former balance sheet strength and financial flexibility.
Conversely, Norcen's credit quality could improve with completion of this transaction, given the substantially increased size and geographic scope of the combined companies, and Norcen's high present debt-leverage. Standard & Poor's will meet with management to discuss further its intention to strengthen the balance sheet of the combined entities.
|
