The urge to merge continues among US upstream independents, with two pairs of midsized companies combining to form bigger ones.
Forest Oil Corp., Denver, and Forcenergy Inc., Miami, have announced their intention to merge. The move will create one of the 10 largest independent exploration and production companies in the US, say the firms.
The combined company will be called Forest Oil Corp. and will be headquartered in Denver. It will initially have about 48 million shares outstanding and a market capitalization of more than $1.5 billion, based on Forest's July 7 closing price of $16/share.
Chesapeake Energy Corp., Oklahoma City, announced Friday that it will acquire Tulsa-based Gothic Energy Corp., in a stock swap valued at $345 million.
The deal will create the 10th largest independent natural gas producer in the US, says Chesapeake. Chesapeake will acquire Gothic's 310 bcfe of reserves at a cost of $1.05/Mcfe.
In other pending US upstream transactions:
- Pangea Petroleum Corp., Houston, has begun preliminary negotiations to acquire a privately held Texas-based exploration and production company, Mass Energy. Mass has extensive mineral leases in East Texas and other valuable assets. If the acquisition is consummated, Pangea plans to develop a significant natural gas project in South Texas. The acquisition is expected to close in 6 weeks.
- Apache Corp., Houston, plans to buy natural gas producing properties in South Texas and the Permian basin from Collins & Ware Inc., Midland, Tex., for $300 million. The properties are producing 40 MMcfd of gas and 4,000 b/d of liquids, and over 90% of the production is operated. The assets hold proven reserves of 502 bcfe, one third of which is liquids. Probable reserves are estimated at 151 bcfe. These properties include 214,000 net acres, 153,000 of which are undeveloped. Also included are 1,928 sq miles of 3D seismic data.
- Union Pacific Resources Group Inc., (UPR), Fort Worth, has retained Madison Energy Advisors Inc., Scottsdale, Ariz., to evaluate and market substantially all of its producing assets in south Louisiana, officials said. Those properties include 52 wells, with UPR holding 100% working interests in most. The proposed package also includes substantial proved nonproducing and proved undeveloped reserves, said officials. In December, net production from the properties included 16.1 MMcfd of gas, 490 b/d of oil, and 54 b/d of natural gas liquids.
Forest-Forcenergy
"This combination meets Forest's criteria of strategic fit," said Robert S. Boswell, who will continue his role as chairman and CEO of Forest. "It places Forest in one of North America's highest-potential frontier exploration areas in Alaska, with an established platform for expansion."
Boswell noted that the transaction also increases Forest's position in the Gulf of Mexico.
Richard G. "Gus" Zepernick, who has served as CEO of Forcenergy, will be named president and COO of Forest.
Under the agreement, which has been unanimously approved by each company's board, Forcenergy common shareholders will receive 1.6 Forest common shares for each Forcenergy common share they own. Forest will also exchange its common stock for Forcenergy's outstanding preferred stock.
After closing, Forest shareholders will hold about 56% of the combined company and Forcenergy shareholders 44%. Forest expects to effect a 2-to-1 reverse split upon completion of the merger.
The merger is expected to be treated as a tax-free reorganization and to be accounted for as a pooling of interests.
Based on the closing price of $16, the transaction has an implied value to Forcenergy's common shareholders of $25.60/share, a 21% premium over Forcenergy's closing price of $21.19/ common share on July 7. Shareholders representing about 67% of Forcenergy and about 37% of Forest have agreed to vote their shares in favor of the merger.
The transaction is subject to approval by shareholders of both companies and to customary regulatory approval.
Two members of Forcener- gy's Board of Directors, Forrest E. Hoglund and Stephen A. Kaplan, will join the Forest board for a total of 12 directors.
Pro forma net production for the combined firm, based on first quarter 2000 data, is 490 MMcfed. Of this, 50% is in the Gulf of Mexico, 15% in the Western US, 13% in the onshore Gulf Coast area, 12% in Canada, and 10% in Alaska. Combined reserves for the merged firm would total 1.408 tcfe.
"The increased cash flow and financial strength provided by the merger will enable the new Forest to aggressively execute its large portfolio of exploration projects on an accelerated timetable," said Forest.
The firm says the new Forest has identified a broad portfolio of development projects. "Forcenergy's significant asset base in the Gulf of Mexico provides a portfolio of properties that were underexploited due to Forcenergy's financial difficulties in 1998 and 1999.
"Development in the Canadian Foothills and on the Liard plateau in the Northwest Territories is planned to be increased," said the company. "In addition, significant growth opportunities have been identified in existing onshore fields, where in-fill and step-out drilling [and] state-of-the-art technologies in reservoir drilling, completion, and production can be used to extend field limits, increase production, and recover more reserves."
Chesapeake-Gothic
"This acquisition fits perfectly with Chesapeake's business strategy of creating value by acquiring and developing low-cost, long-lived natural gas assets onshore in North America, with a principal focus in the Midcontinent, while at the same time steadily improving our balance sheet," said Aubrey K. McClendon, Chesapeake's chairman and CEO.
Michael K. Paulk, CEO of Gothic, says the acquisition will result in a significant premium for Gothic's shareholders, will enable company bondholders to realize a full return on their investment, and "helps solidify Chesapeake's position as one of the top three producers of natural gas in the Midcontinent."
Under the agreement, Chesapeake will acquire all of Gothic Energy's common stock in exchange for 4 million shares of Chesapeake's common stock. Upon close of the transaction, Gothic's shareholders will own approximately 2.7% of Chesapeake's common stock.
In addition, Chesapeake has recently purchased in a series of private transactions 96% of Gothic's $104 million worth of 14.125% senior discount notes for $77 million-$22 million in cash and $55 million in Chesapeake common stock.
The acquisition price values reserves at $1.05/Mcfe after allocation of $20 million of the purchase price to Gothic's leasehold inventory, 3D seismic inventory, lease operating telemetry system, and other assets. Gothic's proved reserves are 96% natural gas, 78% proven and developed, and have an average lifting cost of less than $0.20/Mcfe.
The vast majority of Gothic's assets were once owned by predecessors of BP Amoco PLC.
The reserves are located exclusively in Chesapeake's core Midcontinent operating area and are unhedged after October 2000. Based on current production rates of 80 MMcfed, Gothic has an 11-year reserves-to-production index.
The transaction will increase Chesapeake's current proved reserves by 25% to about 1.6 tcfe and its current production by 22% to 450 MMcfed. Chesapeake also expects to realize $10 million/year of administrative and operational efficiencies and $15 million in noncash interest savings by retiring Gothic's 14.125% senior discount notes.
Because Chesapeake's asset base completely overlaps Gothic's, there will be substantial operational and exploration efficiencies resulting from this combination, says Chesapeake. The firm will now be the largest owner in two of Oklahoma's most prolific gas fields, Watonga-Chickasha and Cement.
Gothic's previously announced plan of restructuring-which involved redemption of Chesapeake's holdings of Gothic preferred and common shares for oil and gas properties and other considerations, exchange of the $104 million senior discount note issue for 94% of Gothic's equity, and an equity rights offering of $15 million-has been terminated in anticipation of this transaction.
The boards of both companies have unanimously approved the transaction. The acquisition is expected to close by yearend, pending regulatory approvals and a Gothic shareholder vote. Gothic plans to hold a special shareholder meeting as soon as possible following completion of the SEC's review of the S-4 proxy statement, which Chesapeake anticipates filing in the next few weeks.
Gothic has agreed to provide Chesapeake with a $10 million break-up fee in the event the transaction is not completed.
Chesapeake announced earlier this month that it had acquired other Midcontinent assets in three separate transactions from an undisclosed seller or sellers valued at $22 million total (OGJ Online, June 15, 2000). The assets included 33 bcf of gas in Oklahoma's Arkoma basin. These properties are contiguous to or near Chesapeake's existing base of operations in eastern Oklahoma and have numerous drilling opportunities associated with them, says the firm.