Conoco Inc, the No 4 U.S. oil company, yesterday said it agreed to buy Gulf Canada Resources Ltd. for about $4.3 billion in cash ($6.7 billion Canadian dollars) in a move aimed at building reserves in North America and Asia.

Conoco's acquisition of Gulf Canada, which has been approved by both boards and should close in the third quarter, will increase its worldwide reserves almost 40 percent to 3.7 billion barrels of oil equivalent (BOE).

Beyond building its oil and gas reserves while energy prices are high, Houston-based Conoco will also keep itself within sight of larger rivals such as Exxon Mobil Corp and Chevron Corp, which is awaiting regulatory approval for its takeover of Texaco Inc.

"This is a good acquisition and definitely the right direction for Conoco," analyst Fadel Gheit of Fahnestock and Co said. One of the top gainers on the New York Stock Exchange, shares of Gulf Resources jumped $2, or almost 34 per cent, to $7.92 in afternoon trading, while in Toronto, Gulf's shares rose C$2.92 to C$12.17. Meanwhile, Conoco's class A shares gained 9 cents at $31.55 on the New York Stock Exchange.

Under terms of the deal, Conoco will pay $8.02 (C$12.40) in cash for each share of Gulf Canada, a premium of about 34 per cent to Gulf Canada's closing price on Monday on the Toronto Stock Exchange. Conoco will also assume about $2 billion (C$3.1 billion) in Gulf Canada's debt, preferred stock and minority interests.

Gulf Canada, which is involved in projects in North America, Indonesia, the Netherlands and Ecuador, has agreed to pay a breakup fee of C$220 million. The deal is expected to immediately add to Conoco's earnings and should result in annual pretax savings of $150 million.

Conoco Chairman and Chief Executive Archie Dunham said in an interview that he had his first face-to-face meeting with Gulf Canada President and Chief Executive Dick Auchinleck just a month ago, on April 30.

He also said Conoco, itself a spin-off of chemical giant Dupont Co in 1998, has looked at about 80 acquisitions over the past couple of years but waited until now for a deal because "Gulf Canada is a very different company than it was a couple years ago," emphasizing Gulf Canada's increase in natural gas assets and stronger balance sheet.

Those natural gas assets build on Conoco's goal of "having more gas as a percentage of its portfolio," Dunham explained. In fact, natural gas producers are a hot commodity. Just this month, two big takeovers have cropped up as large oil companies and power producers search for ways to quickly build their gas portfolios while supplies are short and prices are high.

Barrett Resources Corp agreed to be bought by Williams Cos for $2.5 billion in cash and stock, after fending off a hostile $2 billion bid by Royal Dutch/Shell Group. And Kerr-McGee Corp. unveiled plans to pay $1.3 billion for HS Resources Inc., which, like Barrett, primarily drills for natural gas in the Rocky Mountain region.

There has also been activity on the other side of the border in recent months, with power generator Calpine Corp's $870 million takeover of Canada's Encal Energy Ltd and Talisman Energy Inc's C$731 million purchase of Petromet Resources Ltd.

Both Conoco and Phillips Petroleum Co, its nearest competitor, are flush with cash thanks to strong oil and gas prices and are seeking to use it to buy companies in a business where size matters more than ever.

In February, Phillips made the latest deal in its acquisition spree with a deal to buy refiner and marketer Tosco Corp for $7 billion in stock. Gheit said both Conoco and Phillips will continue to make acquisitions in their race to build their companies.

"There is a direct correlation between higher market capitalizations and higher multiples of earnings," he said. Gheit's only concern about the deal was the amount of debt Conoco will take on.

"This will bulge the total debt of Conoco significantly, giving it the most heavily leveraged balance sheet among the large oil companies," he continued. Dunham said Conoco has committed to reduce its leverage by $2.5 billion to $3 billion in the next 18 months, saying "We've got a tremendous track record reducing our debt."

Conoco said the combined company's Canadian headquarters will remain in Calgary. Gulf Canada's Auchinleck said he has agreed, for a "reasonable transition period," to manage the combined Canadian company and maintain his current position on the board of Gulf Indonesia Resources Ltd. The acquisition is subject to U.S. and Canadian regulatory approvals.

Earlier this month, Gulf Canada reported a first-quarter profit that surged 27-fold, underscoring its return to financial health after years of battling a high debt load. Much of the gain came courtesy of its C$1.5 billion takeover of Crestar Energy last autumn, a deal aimed at beefing up domestic cash flow.

JP Morgan advised Conoco on the deal, and Merrill Lynch and Goldman Sachs acted as financial advisors to Gulf Canada. PanCanadian Petroleum Ltd could be the next big domino to fall in the Canadian energy patch, industry analysts said.

They said PanCanadian, which is due to be spun out later this year by parent Canadian Pacific Ltd, will be among the most vulnerable and attractive targets remaining. "The Canadian oil and gas sector was ripe for a large cap merger and acquisition transaction," said David Stenason, a Montreal analyst with brokerage Scotia Capital.

"But I don't necessarily think this is the end, as there are no sacred cows here. There is no reason why any other senior producer couldn't be taken over in the next 12 months." Canadian Pacific plans to sell its 86 per cent in PanCanadian, the country's top oil and gas producer and explorer. PanCanadian pumped out 167 per cent jump in earnings in the first quarter of this year.

In 2000, it was the first Canadian independent to record more than C$1 billion in annual profit. A combination of a weak Canadian dollar and acquisition-hungry U.S. energy companies, flush with cash from surging oil and gas prices, means established players such as PanCanadian, Nexen Inc and Anderson Exploration Ltd could all be takeover targets, Stenason said.

U.S. firms have been enthusiastic cross-border shoppers in the past two years. A huge rise in natural gas prices, driven by higher demand on electricity generators, has both petroleum producers and power plant operators paying premiums of 20 per cent or more to gain a toehold in Canada, which is less explored than mature U.S. producing basins.

For example, Calpine Corp closed an $869 million takeover of Encal Energy Ltd last month. The San Jose, California-based power generator wanted the Canadian firm's gas production and reserves to secure supply for its North American plants.

Gulf Canada was attractive because it has reserves of more than four trillion cubic feet of natural gas in the Arctic as well as exploration acreage off the east coast, Stenason said. In addition to the purchase price, Conoco will take on $2 billion in debt at Gulf, Canada's sixth-largest energy producer.

Gulf, Imperial Oil Ltd, Canada's largest energy firm, and Shell Canada Ltd, the No 2 player, are jointly studying ways to develop large gas fields,