Sam Fletcher
Senior Writer
HOUSTON, Feb. 24 -- Devon Energy Corp., Oklahoma City, and Ocean Energy Inc., Houston, said Monday they are merging through a stock-swap deal valued at $5.3 billion, making Devon the largest US independent oil and natural gas company, with 650,000 boe/d production and an enterprise value of $20 billion.
Devon Energy will be the surviving company and will continue to be based in Oklahoma City.
"Combining our two companies creates a balanced portfolio with North American and international assets, increased oil and gas production capabilities, and greater internal growth opportunities through an active exploration program," said J. Larry Nichols, Devon Energy's chairman, president, and CEO. He lauded the gain of "Ocean's high-impact, deepwater projects and complementary management skills."
"As part of a much larger organization, our shareholders will benefit from the superior access to capital necessary to accelerate key exploration and development opportunities," said James T. Hackett, chairman, president, and CEO of Ocean Energy. "It also provides a commodity mix weighted positively toward North American natural gas and creates a better balance between exploration and exploitation, minimizing the risk associated with high-impact exploration."
Analysts voice doubts
Some financial analysts Monday questioned whether the deal will be welcomed by the two companies' shareholders.
The merger agreement puts a value of $19.97/share on Ocean Energy stock, representing a 3.6% premium, based on Friday's closing price of $48.23/share for Devon Energy stock, said John P. Herrlin Jr., first vice-president of the Merrill Lynch Global Securities Research & Economics Group. However, he said Merrill Lynch previously put a net asset value of $22/share on Ocean Energy stock.
Herrlin said the proposed merger also provides Devon with Ocean Energy's proven reserves at a price of $1.49/Mcfe.
"We believe most (Ocean Energy) shareholders held (that) stock hoping for a potential acquisition premium and the exploration upside, which is significantly diluted from a. . .shareholder's perspective," said Robert S. Morris, at Salomon Smith Barney Inc., New York, following the merger announcement. "Meanwhile, based on our very preliminary projections, the merger is expected to be roughly 3-5% dilutive to Devon's earnings and cash flow per share and essentially neutral on an enterprise value to cash flow multiple basis."
Devon shareholders also might react negatively "initially" to the proposal, said Herrlin, "given the series of large corporate acquisitions (by Devon) and paucity of information provided" in the merger announcement. With this latest deal, Devon "has taken on $13.3 billion in mergers (inclusive of acquired debt) over the last year," he said. "We were somewhat surprised by the acquisition, given the recent period of asset absorption and concomitant divestitures for (Devon) and given that (the company) has stated that generated cash flow would cover its growth goals."
However, both Nichols and Hackett expressed confidence that the proposed merger will be approved by both shareholders and regulatory officials.
Deal terms
Under terms of the merger agreement, Ocean Energy shareholders will get 0.414 share of Devon Energy common stock for each common Ocean Energy share. That exchange ratio is based on relative market prices for the two securities over the last 30 trading days and will require Devon Energy to issue 73.4 million new shares to Ocean Energy stockholders.
Based on Friday's closing price for Devon stock, company officials estimated the value of shares to be issued at $3.5 billion. Assumption of Ocean Energy's debt and other obligations is expected to increase the acquisition price to $5.3 billion.
The transaction will be on a tax-free basis to shareholders of both companies, officials said.
In a mid-day telephone conference with reporters Monday, Hackett said the proposed merger would have no impact on Ocean Energy's deepwater joint venture with Kerr-McGee Corp., Oklahoma City, in the Gulf of Mexico, especially since Kerr-McGee owns part of Devon.
Ocean Energy was 50% partner with operator Oklahoma City-based Kerr-McGee Corp. in a deepwater natural gas discovery at their Merganser prospect on Atwater Valley Block 37 in the gulf last year (OGJ Online, Apr. 10, 2002).
The 1 OCS 21826 No. 1 discovery well, drilled to 21,268 ft, encountered 150 ft of gas pay in 7,900 ft of water, with a gross estimated reserve potential of 200-400 bcfe.
Merganser was drilled under the deepwater exploratory drilling joint venture in which Kerr-McGee and Ocean Energy are to explore and develop oil and gas prospects on more than 1 million undeveloped acres in the deepwater gulf.
Ocean Energy's North American operations are focused on the shelf and deepwater areas of the Gulf of Mexico, the Rocky Mountains, the Permian basin, the Anadarko basin, East Texas, north Louisiana, and US Gulf Coast region. It also holds a leading position among US independents in West Africa, with activities in Equatorial Guinea, Angola, Nigeria, and the Ivory Coast. Ocean Energy also is active in Egypt, the Russian Republic of Tatarstan, Brazil, and Indonesia.
Earlier this month, IPR Red Sea Ltd. acquired 100% of the stock of Devon Energy International's Egyptian assets in the Gulf of Suez for an undisclosed sum (OGJ Online, Feb. 13, 2003). IPR Red Sea is a subsidiary of IPR Transoil Corp. and a member of the privately held Improved Petroleum Recovery Group of Cos., Irving, Tex. The purchase included the interests of Devon Energy Red Sea Inc. and Devon Energy Suez Inc., which owned interests in the North July and South West Gebel El-Zeit (SWGEZ) concessions, respectively.
During 2002, Devon Energy discontinued its Indonesian, Argentine, and Egyptian operations in an effort to focus its operations on North America.
However, Nichols said Monday, "The properties that we divested in the past were things that we had inherited (through earlier acquisitions) where there was not a critical mass. Egypt is a perfect example: What we had there before was very small. What Ocean has in Egypt is a much more enticing suite of properties."
The two companies still have "significant" overlap in their core areas, providing operational synergies, officials said. They expect general and administrative cost savings of at least $50 million/year.
Among other favorable aspects of the merger, said Morris, "First, the transaction reduces Devon's debt-to-book capitalization to 52% from 60%. Second, Ocean's high-impact international and deepwater exploration and development program increases Devon's 'organic' growth profile. The combined company is expected to grow 'same store' production 4-6% in 2003."
In a later webcast presentation to financial analysts, both Nichols and Hackett emphasized that neither company "had to do this deal. We wanted to do it."
Nichols said, "We could easily have fixed our debt-ratio by letting time take us to where we want to be." But the merger provides a quicker fix, he said. Devon had debt with terms that would not allow the company to pre-pay it, said Nichols, "so we had this high cash flow that we had to sit on. But Ocean has debt we can pay off and bring our (combined) debt rate down."
The combined company will produce 2.4 bcfd of natural gas and 250,000 b/d of oil and natural gas liquids, making it the largest US-based independent, said company officials. It will have 2.2 billion boe of proved reserves, with 84% of that in North America. In fact, 90% of the new Devon Energy's total production will be in North American, of which 69% will be natural gas.
The combined company will hold 29 million net undeveloped acres. With interests in more than 500 deepwater Gulf of Mexico blocks, it also will be the largest independent deepwater leaseholder in the gulf, officials said.
Following the proposed merger, Nichols will retain his positions as chairman and CEO of Devon Energy, while Hackett will become president and chief operating officer. The new board of directors will be comprised of nine members from Devon Energy and four from Ocean Energy.
The boards of directors of both companies have approved the merger, and dates for special meetings of shareholders are expected to be set soon. Completion of the deal is expected in the second or third quarters of this year.
Analyst note
In a weekly report before the merger announcement, Morris noted Devon Energy recently announced additional crude and natural gas price hedge positions.
"The company has now hedged approximately 54% of its projected 2003 worldwide crude oil volumes via costless collars with average floor and ceiling prices of $22.26/bbl and $28.14/bbl, respectively," Morris said. "Devon has also hedged roughly 31% of its projected 2003 natural gas production via collars with average floor and ceiling prices of $3.34/MMbtu and $5.11/MMbtu. In addition, Devon has entered into fixed price collars and swaps covering nearly 7% of projected natural gas production at an average price of $2.94/MMbtu."
Earlier, Devon officials had indicated that their 2003 exploration and development budget would remain essentially flat at $1.5 billion from 2002 levels. However, Ocean Energy had indicated a 43% increase in its exploration and development budget to $900 million from $630 million last year. The oil field service industry will be watching to see if the combined company follows through with those spending projections.
Contact Sam Fletcher at [email protected]
