Snyder and Santa Fe agree to form $1 billion company

Santa Fe, Snyder Combined Operations [93,834 bytes]

Fort Worth's Snyder Oil Corp. and Houston's Santa Fe Energy Resources have revealed some of the details and expected benefits of their planned merger (OGJ, Jan. 18, 1999, Newsletter).

The two independents signed a definitive agreement to form an independent exploration and production company with a market capitalization of more than $1 billion. The new firm, called Santa Fe Snyder Corp., will combine Snyder's strong position in the North American natural gas sector with Santa Fe's solid international portfolio.

The company will be based in Houston and will be owned 60% by Santa Fe's previous shareholders and 40% by Snyder's.

The transaction, in which 2.05 shares of Santa Fe common stock will be traded for each share of Snyder, will be accounted for as a purchase. It is expected to be tax-free to Snyder shareholders.

Snyder Chairman and CEO John C. Snyder will be chairman of the new firm. Santa Fe Chairman and CEO James L. Payne will be CEO.

The merger is expected to close in the second quarter.

Driving forces

In recent months, opportunities arose for both companies to sell out at premium, says Payne, but they found the merger a more attractive option.

"At a time when some weak companies are merging for the purpose of survival, here we had two financially strong independents combining to create a more capable and financially robust company with focus, low-cost operations, and a well-balanced portfolio of international and domestic properties," said Snyder.

In a merger partner, Snyder looked for shareholder value, but also for a shared vision, he said.

The merger with Santa Fe held four key advantages for his company:

Built-in growth.

"Snyder has continually looked at reentering the international arena," said Snyder. "It was important to find an establishedellipseoperation with a proven technical infrastructure in place. With Santa Fe, we achieve those criteria."

Asset combination and focus on core areas.

"The asset bases of these two companies are extremely complementary," Snyder said. In the U.S., each company has about 100 million boe of reserves, so the transaction will enable them to essentially double reserves overnight. And the merger will add only one core area to their operations. "The areas are also very complementary," said Snyder.

Cost savings.

"(We) believe that we can reduce the two companies' cash costs by $20 million/year, which will increase the cash flow by almost 10%," said Snyder.

Added financial strength.

"If this price environment continues," he added, "the opportunities to grow the company through strategic acquisition will be abundant. Both companies have historically been very conservative in this area. Now, with prices and valuations low, the new company can capitalize on those opportunities without compromising our financial integrity.

"In today's low oil price environment, we can emphasize developing gas on Snyder's large acreage position in the RockiesellipseWhen oil prices normalize, we can shift more emphasis to developing oil properties on Santa Fe's West Texas properties."

Payne says the firms expect to achieve the cost reduction of $20 million/year "within the first couple of months of operation." But this was not the driving force for the merger, say the firms.

"These are two well-run companies," said Payne. "If you could take a whole lot of cost savings out, other than the $20 million, then we wouldn't have been well-run companies.

"The $20 million in cost savings is sort of a bonus, on top of the merger," he said. It will also make the transaction accretive to both companies, says Santa Fe's Janet Clark.

Nevertheless, the firms hope to achieve other savings as well.

General and administrative costs will be about 55¢/boe by yearend 1999, says Payne, "which is going to be as low as it gets in this industry."

Operations

Key producing areas for the companies are:

Snyder-Rocky Mountains, Lou- isiana, Gulf of Mexico.
Santa Fe-Permian basin, Gulf of Mexico, Argentina, Gabon, Indonesia.

Between the firms, they have 310 million boe of booked proved reserves, of which 250 million was found in the last 3 years.

"I think that, in itself, speaks well for the ability of these companies to generate internal growth," said Payne.

On a combined basis, the firms' reserves consist of about 60% oil and 40% gas, and about two-thirds of them are in the U.S.

The companies have a combined reserves life of more than 8 years. And their joint reserves replacement factor for the last 2 years is 260%, three-fourths of which was attained through the drill bit.

Production growth in 1998 was 20%, on a combined basis. And consolidated production for the firms is expected to average 110,000 boed in 1999, 55% of which will be gas and 70% of which will be in the U.S.

"In the next 2-3 years, you're going to see a lot of additional production come on (stream) from these two companies," said Payne. "We have a lot of unbooked reserves out there...It's just a matter of how fast it comes on.

"The beauty of this combination, as we go forward, is that we've got the inventory and the wherewithal to keep that (growth) right on going."

This gives the combine financial strength and flexibility, says Payne.

Divestitures, acquisitions

The transaction is expected to provide added flexibility, because it will give the firms opportunities to divest overlapping or noncore assets and to make additional strategic acquisitions.

"In the Gulf of Mexico, where we have a complete overlap of operations, we can do a lot of high-grading," said Snyder.

The companies' combined gas production in the gulf is more than 200 MMcfed.

"We've got the built-in growth in the gulf to keep that production flat to growing slightly in the next 3 years," said Payne. This is what gives the firms "plenty of opportunity to rationalize our assets," he said.

Snyder recently completed a divestiture in the Rocky Mountains region. It sold its remaining 55% interest in the Southeast Piceance project in northwestern Colorado to Ballard Petroleum LLC for $28.8 million in cash.

The project accounted for less than 5% of Snyder's production in third quarter 1998, and for about 7% of its proved reserves at yearend. Snyder said the sale allows it to focus its Rocky Mountains operations in Wyoming and Utah.

About the possibility of future acquisitions, Payne said, "We all know that there's going to be a lot of rationalization in the United States-both in the Permian basin and in the Rocky Mountains-by the majors as these mergers go forward. And I think we have the ability to be a big player there.

"At the same time, we have the ability and the expertise to look around the world for other opportunities in this depressed market. And I think you'll findellipsethat we will do some otherellipsetransactions."

Snyder noted that he had found Cairn Energy plc, a Snyder affiliate based in Edinburgh, an interesting potential acquisition candidate: "I hope we'll get a chance to take a look at that at some point."

"If we could find an attractive (international) acquisition or merger candidateellipseI think we would take a hard look at it," added Payne. "We've got the expertise to do it."

Spending

Assuming the merger is approved, the new firm's plans include a capital budget of $250-275 million in 1999, about 55% of which will be spent in the U.S.

Given the current oil price environment, both firms have cut back on their capital budgets recently, says Clark. She cautioned that the 1999 budget may see some adjustment before the end of the year.

Based on current plans, however, U.S. capital spending by region will be: about $25 million in the Permian basin, $75-80 million in Louisiana and the Gulf of Mexico, and $45-50 million in the Rocky Mountains.

Snyder is doing some exploratory drilling in northern Louisiana, where its first well there will be tested in early February. "We've hit it," said Snyder. "We know the reefs are there, but we don't know what the rocks are going to give up yet."

Santa Fe is currently drilling a well on South Timbalier Block 186 in the Gulf of Mexico, which has the potential to be a 50 bcf prospect, according to Payne. And Snyder has several undeveloped leases in the Main Pass area of the gulf, in addition to its producing fields there.

In the deepwater gulf, the firms plan to drill four or five wells in the Flex trend.

"Neither Santa Fe nor Snyder has a very good track record in the deep water," said Payne. "We will take one more kick at the can to see if we can do anything."

Outside the U.S., combined capital spending will be: about $15 million in Argentina, $39 million in Indonesia, and about $20 million each in Brazil, China, and Gabon.

Santa Fe has five prospects in South China. And it recently formed a joint venture with Petroleo Brasileiro SA to explore two blocks in Brazil's offshore Portiguar basin (OGJ, Jan. 4, 1999, p. 31).

Payne summarized the benefits of the transaction: "Santa Fe Snyder will have the scale, diversity of operations, and financial strength to become one of the very top independent exploration and production companies in the worldellipseWe intend to take advantage of the current conditions in the energy industry to opportunistically pursue acquisitions of high-quality assets worldwide."