Petro-Canada (NYSE: PCZ) plans to acquire international oil and gas operations of Veba Oil & Gas from BP Plc (NYSE: BP) for C$3.2 billion in cash in the North Sea, North Africa, including Libya, and northern Latin America. Veba produces about 175,000 BOE per day and has almost 600 million BOE of proven reserves. The purchase will be a significant expansion for the Calgary integrated, making it Canada's largest major and a significant international player. "We seized a rare opportunity to acquire a business of superb quality," says Petro-Canada president Ron Brenneman. Initial market reaction was not favorable. PCZ closed US76 cents lower at US$22.30 on the New York Stock Exchange the day following the announcement. Canadian oil investment analysts consider the drop a knee-jerk reaction. "The market voted with its feet against the extra debt level as well as the additional political risk," says Terry S. Peters of HSBC Securities (Canada) Inc. in Toronto. "Some of these issues really should be no surprise, since Petro-Canada said it would look internationally to augment its E&P base. My view is that it's a pretty good acquisition." Stephen Calderwood with Salman Partners in Calgary says Petro-Canada is paying a reasonable price, "certainly below the average finding cost in western Canada. Veba has been in some of these countries for about 40 years and managed to enter others where its critical mass may not be sufficient for Petro-Canada. It's in a position where it can sell such properties, a luxury that Veba and BP did not have. When you buy a whole suite of assets, you can sell some and focus on one or two areas." BP has a 51% interest and operational control of Veba, with German energy merchant E.ON AG. The sale of Veba's upstream holdings will bring BP an estimated US$1.65 billion and E.ON approximately US$350 million. Veba's North Sea assets include interests in the Guillemot and Scott fields in the U.K. and in the Hanze field in the Netherlands, production in Norway and exploration interests in Denmark and the Faroe Islands. In North Africa, it has significant production with considerable development potential in Libya, as well as strong production from Syria and a small position in Egypt. In Latin America, Veba has an interest in the Cerro Negro integrated heavy-oil development in Venezuela, as well as an interest in an offshore gas development in Trinidad. The cash will come from credit facilities underwritten by Royal Bank of Canada and Deutsche Bank AG. Harrison Lovegrove & Co. was Petro-Canada's primary advisor. Gaffney Cline & Associates Ltd., Merrill Lynch Canada Inc. and RBC Capital Markets also advised the company. -Nick Snow

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