Ocean Energy, Seagull tout merger benefits

Steven Poruban
Staff Writer

As oil and gas prices continue to dredge even deeper, more and more companies are looking for ways to weather the financial storm. Even before the recent major players' announcements of plans to join forces, independents had jumped aboard the merger bandwagon.

The recently announced merger of two independents-Ocean Energy Inc. and Seagull Energy Corp., both of Houston-will create the U.S.'s 10th largest publicly traded independent oil and gas company, based on reserves, say the participants (OGJ, Nov. 30, 1998, Newsletter).

The new company, which will retain the Ocean Energy name, will have an equity value of $1.8 billion and a combined enterprise value of about $3.6 billion. The firms hope to reduce costs by $45-50 million/year.

Ocean Energy's reserves currently are split evenly between gas and oil. Following the merger, they will be composed of 57% gas and 43% oil.

On a pro forma basis, the company expects to produce 80,000 b/d of oil and 622 MMcfd of gas, or 184,000 boed, in 1999. It hopes to achieve regular production increases of 5-10%/year.

The companies' shareholders are expected to meet to vote on the deal by early March 1999.

Deal details

The merger comprises a tax-free, stock-for-stock exchange. Existing Ocean Energy shareholders will own 61.5% of the new company and current Seagull Energy shareholders 38.5%. About 165 million shares will be outstanding.

The new Ocean Energy management will own 10.5% of the combined company's stock. Current Ocean Energy Pres. and CEO Jim Flores will hold the largest portion, at about 6.6%.

Seagull Energy Pres. and CEO Jim Hackett will also be a significant equity owner, forgoing his salary to take a stake in the new company.

Flores will become chairman of the new company, while Hackett will be president and CEO. The displaced former chairmen-Seagull's Barry J. Galt and Ocean Energy's John B. Brock-will both serve on the board of the new company, comprised of eight board members from Ocean Energy and seven from Seagull.

"Rest assured that management is very motivated to have the stock move up and deliver shareholder value," said Brock at a recent joint meeting of the Gulf Coast section of the Society of Petroleum Engineers and the American Petroleum Institute.

North America operations

The newly formed company will be divided into three business units: Onshore North America, Gulf of Mexico, and International.

Included in the Onshore North American group is Ocean Energy's Bear Paw field in northern Montana, where the company has drilled 79 wells with a 78% success rate. Among other assets in this region are properties in the Permian basin and in the Towns- end, N.M., area.

The North America unit will also include Seagull's recently acquired onshore oil and gas properties in East Texas and western Oklahoma, with combined reserves of 102 bcfe (OGJ, Apr. 13, 1998, p. 38). Seagull also brings its Alaskan natural gas transmission and distribution system, called Enstar, which serves the greater Anchorage area.

Offshore, the new company also will own 300 blocks on the continental shelf and 50-60 blocks in the deepwater Gulf of Mexico, said Brock. A substantial portion of these are 100% owned. The new Ocean Energy has significant plans for the deepwater gulf in 1999.

Most notable among Ocean's partnerships in the gulf is the subsalt Hickory discovery on Grand Isle Block 116, a joint effort with Anadarko Petroleum Corp. and Shell Oil Co. (OGJ, Oct. 26, 1998, Newsletter).

Production from the field is slated to begin in 2000.

International activities

As of yearend 1997, about 25% of Ocean Energy's production of 271 million boe was outside North America, compared with 70% of Seagull's 217 million boe.

West Africa is a key area of focus for Ocean Energy. Its current offshore development projects include a joint effort with Mobil Corp. in Block B Zafiro field off Equatorial Guinea.

The third phase of development from the Jade platform will boost Zafiro production to 120,000 b/d of oil from 80,000 b/d (OGJ, Aug. 31, 1998, p. 72). Mobil has a 71.25% interest in Block B and Ocean Energy 23.75%.

Ocean Energy also holds a 15% interest in the 1.1 million-acre Block 24 in the deep water off Angola, 210 miles south of Luanda (OGJ, June 1, 1998, p. 38).

In the Middle East, Ocean recently acquired a 70% working interest in Block 43 in Yemen, where it serves as operator. Seismic and geological tests are slated for 1999, with the first wells planned for early 2000 (OGJ, Sept. 21, 1998, p. 46).

Seagull produces 40,000 b/d of oil from Qarun field on the Qarun concession, southwest of Cairo. Its partners are Apache Corp. and Egypt's Qarun Petroleum Co. (OGJ, June 1, 1998, p. 48).

Earlier this year, Seagull Energy discovered a "new oil province" after drilling two delineation wells on the East Beni Suef concession in Egypt's western desert with 50-50 partner Apache (OGJ, May 25, 1998, p. 28). Seagull also holds oil and gas exploration and development assets in Ivory Coast, Indonesia, and the Russian republic of Tatarstan.

On a combined basis, the merged company will own about 26 blocks outside North America, comprising about 28 million acres. The companies own 100% interests in about half of these blocks.

Future plans

Less than a year ago, Ocean Energy completed a merger with United Meridian Corp. (OGJ, Dec. 29, 1997, Newsletter). Unlike the United Meridian deal, said Brock, the merger with Seagull Energy comes with added savings that weren't present before.

Through this latest merger, the new company expects to shave $45-50 million/year from its expenses-an amount equivalent to 4.5% of expected total revenues. "Depending on price assumptions, (the new company) will have about $1 billion/year in revenue," said Brock.

The new Ocean Energy will do away with some costs through the elimination of one of the corporate headquarters sites, and by reducing staff. Also, the firm plans to part with $100-200 million in non-strategic assets, including unwanted block interests and non-core reserves, by yearend 1999.

Another advantage over the United Meridian merger, explained Brock, will be the use of purchase accounting instead of pooling. So far this year, Ocean has been unable to make any asset distributions so as not to affect the pooling structure. The new company will use full cost accounting.

"This transaction will not have (the pooling) restriction, so we will be free to do considerable asset rationalization in 1999, and we plan to do so," said Brock.

"We think that this (transaction) will be a very significant platform for additional consolidation opportunities," he added. "Additional transactions can be folded in with significant reductions in costs."

The two companies, on a combined basis, expect to spend a total of $1.2 billion in 1998. That will decrease substantially in 1999, when the new Ocean Energy plans to spend $500-600 million, 60-70% in the U.S. and 30-40% inoutside the U.S.

Exploration will comprise 15-20% of the budget, while the balance will be spent on exploitation and development.

In effect, the merger has formed a "very substantial company that is large enough to play in the deepwater gulf and is large enough to continue to pursue what Ocean Energy has been able to achieve on an international level," said Brock.