Cross Timbers shoots for 90% gas portfolio

Anne Rhodes
Associate Managing Editor-News

Cross timbers' new producing areas [140,793 bytes]
Cross Timbers Oil Co. has made an acquisition that will round out its portfolio of U.S. natural gas properties and move it further toward its ultimate goal of having a reserves base that consists of 90% natural gas.

In its latest in a series of growth moves, Fort Worth-based Cross Timbers signed a definitive agreement with Lehman Bros. Holding Inc. to acquire, on a 50-50 basis, the common stock of Spring Holding Co., a private oil and gas company based in Tulsa. The $85 million transaction breaks down as follows: Cross Timbers will issue 4 million shares at $11.425/share and will receive $3.2 million in cash. Lehman Bros. will contribute $42.5 million in cash and will give Cross Timbers the opportunity to acquire its half of Spring at a later date-possibly this year, said Keith A. Hutton, Cross Timbers' senior vice-president of asset development, at the company's annual meeting earlier this month.

Spring's assets include proved reserves of 264 bcfe, as of yearend 1998. Its reserves are 99% gas and 85% proved developed, according to Cross Timbers. And Spring's properties have a reserves life of 11 years.

Spring owns interests in about 1,400 wells on 340,000 net acres. About 97% of these wells are in the Arkoma basin, while the remainder are in the Texas panhandle (see map).

Cross Timbers ascribes $20 million in value to Spring's non-producing assets, including gas gatherer and marketer Mega Natural Gas Co. LLC, other compression and gathering assets, and undeveloped acreage.

Mega owns two gas gathering systems-one in Cole County, Oklahoma, and another in Logan County, Arkan- sas. It markets 120 MMcfd of gas and owns 180 compressors.

A gas boost

The Spring acquisition gives Cross Timbers a key position in the Arkoma basin, which straddles the Arkansas-Oklahoma border.

"This is the last of the major gas producing opportunities in the U.S. in which we did not have a play," said Steffen E. Palko, vice-chairman and president of Cross Timbers, at the annual meeting.

"Cross Timbers has long sought a meaningful position in the Arkoma basin. This basin is well known for its shallow production decline rates, multiple formations, and complex geology."

The deal also will help Cross Timbers reduce gas gathering charges. But Palko detailed several other reasons Cross Timbers is excited about acquiring the Spring properties. They will provide Cross Timbers:

Improved operations resulting from commingling, artificial lift, and compressor optimization.
Exploitation opportunities through recompletions, stimulations, and development drilling.
Royalty trust potential.

When approved, the acquisition will take Cross Timbers' reserves base to about 80% gas from 70%. A further increase to 90% is planned. This compares with a gas ratio of 57% in 1993.

Clearly, Cross Timbers sees natural gas as key to its future success. Why? According to Chairman and CEO Bob Simpson, there are three key reasons: no competition from members of the Organization of Petroleum Exporting Countries, no international "overhang," and increasing demand for electricity generation.

The company's push to move its portfolio further toward the gas side is only one facet of its strategy. It is also nearing the end of an aggressive campaign of growth through acquisitions (OGJ, June 1, 1998, p. 25).

In early 1997, Cross Timbers' management set a goal to complete strategic property acquisitions totaling more than $260 million by the end of 1999. Through the end of 1998, the company had purchased $560 million in quality properties, creating new core operating areas in the San Juan basin and East Texas, while making significant additions to its operations in Oklahoma.

"Most of our fellow companies are still reeling from low oil prices," said Palko. "We are exhibiting aggressive growth on the heels of the worst period we ever saw in pricing."

Another of Cross Timbers' goals is to reduce debt by $300 million. The company has already cut its debt by about $180 million. To finish the task, says Simpson, it will use a variety of techniques.

Property sales will account for $50-70 million of debt reduction, while $40-80 million will be achieved through selling off a portion of its equity portfolio. Simpson expects improved cash flow to knock another $20-40 million off Cross Timbers' debt.

Its goal for 1999 is to get its debt down to $2.40/boe. But Simpson told stockholders at the annual meeting, "Don't get locked in at a certain level. There are many elements to debt. The growth in reserves will also help us reach our goal."

The company is also mulling another oil royalty trust, this one in the Permian basin.

"We have the capital structure to take advantage of the consolidation of the majors, but we must get our house in order," said Simpson.