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The Globe & Mail: Rumour mongers focus on Western Oil Sands spinoff

EXTRACT: Looming large over all this speculation on Western’s future are the company’s two partners on the Athabasca project; Royal Dutch Shell and Chevron. Both are seen as potential buyers, with little reason to commit their money unless another outside bidder makes a play for Western.

THE ARTICLE

STREETWISE
ANDREW WILLIS

July 24, 2007

There’s a new variation on one of the oil patch’s favourite rumours, as perennial takeover target Western Oil Sands is expected to gussy itself up by spinning off a portion of its controversial Iraq oil properties.

Western, a $6-billion player in the Canadian oil sands, raised hackles 12 months ago by announcing a $45-million, four-year capital spending plan for Kurdish oil properties. Management claims that it was buying property in a stable region of Iraq drew the same sort of skepticism from investors that teenagers receive when they announce plans for “small” house parties.

The Iraq venture effectively put Western in play, but to date, there have been no offers. The latest restructuring of the company to make the rounds in Calgary has Western spinning out a minority stake in its Iraq property to help potential buyers get a better handle on the whole company.

The Iraq subsidiary is called Western Zagros Ltd., and the parent is expected to offer investors with a hankering for exposure to all things Kurdish a 20-per-cent stake. Such a restructuring would be in keeping with the investor-friendly deals that marked the creation of the energy trusts: Mature properties were converted into trust units, while junior exploration companies were spun out.

With the problem child clearly separated from the parent, Western would demonstrate what the Iraq play is worth, and enjoy more flexibility in dealing with the unit in the future.

The second stage in this drama would be a final decision on the fate of the parent company. On this front, a long list of major energy companies have been mentioned as possible buyers. The latest speculation has a consortium of an energy company and a miner stepping forward to buy Western, and in doing so take over its 20-per-cent stake in the Athabasca oil sands project.

There is a precedent for mining involvement in the oil sands, as Teck Cominco spent $475-million for a 15-per-cent stake in the Fort Hills project. With that investment, Teck became a partner with Petro-Canada and UTS Energy.

Looming large over all this speculation on Western’s future are the company’s two partners on the Athabasca project; Royal Dutch Shell and Chevron. Both are seen as potential buyers, with little reason to commit their money unless another outside bidder makes a play for Western.

The ebb and flow of takeover talk has moved Western’s stock price for the better part of a year. Last September, hedge fund Saluda Capital pushed for the spinout of Western Zagros as part of a larger campaign to get the whole company sold. While the activist campaign hasn’t resulted in a sale just yet, Western did announce it was looking at strategic options back in February, with TD Securities and Goldman Sachs hired to run the process.

The lack of bidders for Western could reflect something of a glut in supply. Oil sands plays, with their massive capital costs, are big-ticket items. Right now, there are several oil sands companies beside Western that are up for grabs, including UTS, OPTI Canada and Synenco Energy.

Takeovers have tended to be slow, but steady. The biggest deal seen to date was Royal Dutch Shell’s $8.7-billion buyout of minority shareholders in its Canadian subsidiary. Other takeovers include Total SA’s $1.7-billion (U.S.) purchase of Deer Creek and Shell’s $2.4-billion takeover of Blackrock Ventures.

Railway Mulls options

Generations of RBC Dominion Securities investment bankers have helped shape the various incarnations of Canadian Pacific.

The current generation of M&A advisers may write the final chapter in this 120-year-old company’s history.

Canadian Pacific Railway hired RBC Dominion and Morgan Stanley, another long-time adviser, to help deal with a proposed takeover from Brookfield Asset Management, according to sources close to the railway. The railway rebuffed the Brookfield overture as “inadequate,” but with the interest public, it is in play.

The railway has a credible management team and solid prospects as a stand-alone company, so it may be able to roll out a simple “Just Say No” defence, but rival railways and financial players will certainly take a look.

See Andrew Willis’s blog at globeandmail.com/blogs/streetwise

http://www.theglobeandmail.com/servlet/story/LAC.20070724.RWILLIS24/TPStory/Business

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