Merger and acquisition activity among oil and gas companies has remained relatively heated in recent weeks. M&A action was capped off early last week with the announcement of two major consolidations involving US firms in the refining sector and in exploration and production.
Valero Energy Corp. said it plans to acquire Ultramar Diamond Shamrock Corp. for $6 billion, making the combined company one of the nation's largest refiners.
Meanwhile, Williams Cos. Inc., Tulsa, early last week announced an agreement to acquire Barrett Resources Corp., Denver, for $2.8 billion in a deal that will more than double Williams's natural gas reserves.
Other, lower-profile M&A action in recent weeks included these transactions:
- BP PLC, London, acquired Bayer AG's interest in their German petrochemical joint venture, Erdoelchemie GMBH.
- National Fuel Exploration Corp., a subsidiary of Buffalo, NY-based Seneca Resources Corp., agreed to acquire Player Petroleum Corp., Calgary, in a transaction worth $165 million (Can.).
- Plains All American Pipeline LP, Houston, agreed to buy Canpet Energy Group Inc., Calgary, for $42 million-$26 million in cash and the rest in stock.
- Abraxas Petroleum Corp., San Antonio, intends to offer to buy the 51% of stock in Grey Wolf Exploration Inc., Calgary, that it does not already own.
Valero to acquire UDS
Combined, Valero and UDS, would have 23,000 employees in the US and Canada and own 13 refineries (see map). Valero will also be one of the nation's largest retailers, with more than 5,000 retail outlets in the US and Canada. Both companies are based in San Antonio.
With this acquisition, Valero will have annual revenues of $32 billion and total assets of more than $10 billion. In terms of crude distillation capacity, the combined company would be the third or fourth largest refiner in the US.
The transaction value includes $4 billion in equity and $2 billion in assumed debt. The total consideration to be paid to UDS stockholders equates to a fixed exchange of 1.228 shares of Valero common stock for half of the outstanding shares of UDS common stock and $55/share in cash for the remaining shares of UDS common stock.
Valero said the cash consideration and the stock consideration per UDS share each represents a 30% premium to UDS shareholders based on the average price per share for the 10 days ended Apr. 26. UDS shareholders could elect to receive either cash or Valero common stock for each share of UDS common stock.
Bill Greehey, Valero's chairman and CEO, said, "We're combining the two best independent refining and marketing companies to make the premier refiner and marketer in the US. Obviously, this will bring tremendous benefits to both of our organizations and to our shareholders. In fact, in refining and marketing, we will be the only major independent of a size and scope equal to the majors.
"Combining Valero's complex refining system and the extensive UDS refining, logistics, and retail network gives us a superior asset portfolio that will allow us to effectively compete in this rapidly consolidating business. We will realize tremendous synergies and strategic benefits while enhancing earnings stability."
Jean Gaulin, UDS chairman and CEO, said, "This really is a winning combination for our stockholders. UDS shareholders will receive a substantial premium, which reflects a more appropriate valuation for the stock and captures value that the market has otherwise been slow to recognize."
Valero-UDS assets
With the addition of the UDS refining assets, Valero said it would have the most geographic diversity among US refiners.
Like Valero's six refineries, the seven UDS refineries are generally high-conversion facilities that produce cleaner-burning fuels, including reformulated gasoline, California Air Resources Board (CARB) formula gasoline, and CARB diesel. Valero will also acquire UDS's 4,600-mile pipeline network, including the Shamrock Logistics MLP and associated assets.
Greehey said, "We will benefit from enhanced financial performance through realization of numerous potential synergies among the facilities, including multirefinery purchasing and inventory optimization. We estimate that these synergies will have a benefit in excess of $200 million/year.
"The current industry fundamentals and the long-term outlook for our business have never been better. Refined product inventories continue to trend at historically low levels. At the same time, gasoline and distillate demand remain strong. With limited excess refining capacity in the US, there is very little room for inventories to build substantially in the near future. This should continue to keep the supply-demand balance tight and support healthy refining margins going forward."
UDS owns gasoline stations branded Ultramar, Diamond Shamrock, Beacon, and Total at more than 2,500 sites in the West, Southwest, and Midcontinent, and in eastern Canada. The company also supplies 2,500 dealer, truck stop, and cardlock sites in the Southwest, Midconti- nent, and eastern Canada.
In addition, UDS operates one of the largest heating oil businesses in North America, supplying 250,000 households.
Greehey said, "We're excited to substantially grow our retail presence, because retail margins are counter-cyclical to refining margins, so in the event we experience lower refining margins, retail margins will help stabilize our earnings." Greehey will remain Valero chairman and CEO. Four UDS directors will be added to the Valero board, expanding it to 13. Gaulin will work with Greehey on the organization of the new Valero and then will retire.
The boards of both companies have approved the transaction, which is subject to the approval of stockholders and regulators. The acquisition is expected to close by yearend.
Valero has 3,100 employees and had revenues of nearly $15 billion in 2000. It has six refineries in Texas, Louisiana, New Jersey, and California with a combined distillation capacity of 712,000 b/d, according to an Oil & Gas Journal survey. It bulk markets in 34 states and operates 350 retail locations in California.
UDS, meanwhile, has more than 20,000 employees and had $17 billion in revenues last year. It operates seven refineries in the US and Canada with total throughput capacity of 750,000 b/d, according to an OGJ survey. It has nearly 5,000 retail stores and petrochemicals and heating oil businesses.
Reactions
Following Valero's announcement to acquire UDS, Moody's Investors Service placed the ratings of both independent refiners under review for possible upgrade.
"Despite the strong near-term outlook for US refining margins based on low gasoline inventories, [we] believe margins will continue to be volatile and cyclical," Moody's reasoned.
Meanwhile, following the companies' announcement, New York City-based ratings firm Fitch IBCA, Duff & Phelps placed UDS on negative rating watch.
"If margins remain at or near the current peak levels-the highest since the Gulf War-Valero management should be able to minimize the debt required to finance the $2 billion cash portion of the transaction," Fitch noted.
"Should the strong industry margins persist," Fitch added, "Valero's plan to aggressively reduce debt would put positive pressure on the combined company's credit profile."
Williams's Barrett purchase
Williams anticipates ramping up its natural gas-fired power generation in coming years, it said. The Williams-Barrett deal was disclosed earlier this month after analysts mistakenly were included in a conference call, during which Williams board members discussed an offer for Barrett.
Shell Oil Co. had made a $2 billion unsolicited bid for Barrett, a bid it pursued for almost 2 months (OGJ Online, May 2, 2001). Barrett put itself on the auction block after Shell announced its offer in March.
Shell said it has elected to discontinue its efforts to purchase Barrett because of its unwillingness to increase its offer "beyond a level that makes economic sense to Shell."
The boards of Williams and Barrett have approved the merger, which calls for a first-step cash tender offer of $73/share for 50% of the outstanding Barrett common stock, followed by a second-step merger with a fixed exchange ratio of 1.767/share of Williams common stock for each remaining share of Barrett common stock.
The merger agreement also calls for a termination fee of $75.5 million and reimbursement of expenses to Williams of up to $15 million. The $2.8 billion deal includes $300 million of Barrett debt and is the equivalent of $1.34/Mcf of proved reserves.
The transaction, contingent on approval from antitrust regulators and shareholders, could be completed in 90 days.
Keith E. Bailey, Williams's chairman, president, and CEO, told analysts in a conference call that the transaction is contingent on getting 50% of Barrett stock during the tender offer.
Steven J. Malcolm, executive vice-president of Williams and president of Will- iams Energy Services, said Barrett provides "the opportunity to achieve better balance in our natural gas-power portfolio and underpin our ability to continue to profitably grow our power business while maintaining a risk profile."
Williams has the goal of developing 15,000 Mw of power generation by the end of 2003 and 40,000 Mw of power generation by the end of 2005, executives confirmed during the call.
Bailey said the additional gas production will provide Williams with a physical hedge to reduce gas price risk.
Barrett has drilling prospects and core areas for exploration in the Piceance, Powder River, Wind River, and Raton basins, Malcolm said. He added that Williams has substantial production operations in the Green River and San Juan basins in the Rockies.
He also said Williams plans to retain most of Barrett's 237 employees and maintain Barrett's Denver headquarters as Williams's principal office for Rocky Mountain exploration and production operations.
At yearend 2000, Williams had 1.2 tcfe of proved gas reserves. As of Mar. 31, Barrett's proved reserves were 2.1 tcfe.
Williams produces 210 MMcfed; Barrett produces about 345 MMcfed. The combination would allow Williams to achieve the goal of doubling reserves and production more than 2 years ahead of the yearend 2003 target in its strategic plan. Measured by US natural gas reserves, Williams would advance to the 10th largest company from the 25th.
Reactions
After Williams's announcement to acquire Barrett, Moody's said that it expected for the transaction to have a "neutral to slightly positive impact" on the company's "leverage and coverage measures."
The analyst added, "Reflecting current strong gas prices, Barrett is producing robust cash flows relative to its debt obligations, and [that will] help to somewhat improve Williams's pro forma credit measures."
Moody's also said that the acquisition price was "fully valued," at about $1.33/Mcfe, "particularly considering that much of the value lies in proven, undeveloped reserves, which will require additional capital for development."
Reacting to the announced acquisition, Lehman Bros. Inc. commented, "We believe that the valuation implied in Williams's offer for Barrett has positive implications for the broader small capitalization producer group."
In a May 7 research note, UBS Warburg LLC stated that Williams's announcement to purchase Barrett came as no surprise. The analyst said that Williams had expressed a desire to "grow through external means" and wished to mitigate its mounting "net short" natural gas position resulting from its increasing interests in the power generation sector. In addition, UBS Warburg noted that Williams has a history of growing though such "sizable deals," notably the acquisitions of Mapco Inc., Tulsa, and of Houston-based Transcontinental Gas Pipe Line Corp.
BP's petrochem JV buy
Following the transaction, Erdoelchemie is now a wholly owned subsidiary of BP's German operating company, Deutsche BP AG. Financial details of the transaction were not disclosed.
BP and Leverkusen, Germany-based Bayer founded Erdoelchemie in 1957 as a 50-50 JV. The petrochemical plant is on the Rhine at Cologne-Worringen near Cologne. It employs 2,200 workers and produces 4.4 million tonnes/year of petrochemicals.
In recent years, BP and Bayer sanctioned numerous expansions at Erdoelchemie, most recently a 200,000 tonne/year ethylene cracker expansion, expected on stream in June. The investment program is expected to continue under BP's ownership.
The acquisition reinforces BP's European and global positions in polyethylene, acrylonitrile, aromatics, ethylene oxide, and its EO derivatives. Erdoelchemie will account for 18% of BP's total worldwide petrochemical capacity.
The integration of Erdoelchemie into BP's chemicals business is a priority, executives said.
BP and Bayer will continue to have business relationships at Erdoelchemie, where BP supplies numerous feedstocks to Bayer's adjacent Dormagen site and Bayer provides numerous services to the Erdoelchemie site.
National Fuel-Player deal
National Fuel's proposal is to pay $16.25/share for Player stock and to assume debt and working capital deficiency of $10 million. Player is an oil and natural gas exploration company focused on western Canada.
The offer represents a 14% premium to a 30-day weighted average trading price, Player said. The directors of Player and National Fuel have unanimously supported the offer.
Among other requirements, 66.67% or more of Player's shares must be tendered. Player has agreed not to solicit or initiate discussions with any third party. The agreement also provides that National Fuel will receive a $7 million termination fee in certain circumstances.
Steve Johnson, president and CEO of Player, said, "We are pleased to accept this offer, which represents fair value for the company. In fact, the offer reflects a 52% return for shareholders since the beginning of the year and 207% over the last 12 months."
Plains's Canpet purchase
Canpet is a crude oil and LPG marketing company. It gathers 75,000 b/d of crude and markets 26,000 b/d of NGL. Its assets include a crude handling facility, 130,000 bbl of tankage, and working capital of $8.5 million.
The deal, which was struck last month, is subject to regulatory approval and other conditions but is expected to close in 30-45 days.
"The acquisition of Canpet will complement the pending acquisition of Murphy Oil Co. Ltd.'s Canadian crude oil pipeline, gathering, storage, and terminaling assets announced last month," said Harry Pefanis, Plains All American president and CEO. He said the two acquisitions will form a platform to build and expand the company's presence in Canada.
Plains All American estimates Canpet will contribute $7.5 million/year to earnings before interest, taxes, depreciation, and amortization.
Abraxas-Grey Wolf offer
Abraxas intends to offer 0.6 share of its common stock for each share of Grey Wolf Exploration common.
Robert Watson, Abraxas chairman and CEO, said, "Bringing Grey Wolf Exploration fully into Abraxas will further increase operating efficiencies and avoid duplication of public filing expenses."
Abraxas decided to make its offer directly to the Grey Wolf Exploration stockholders because a previous offer made by Abraxas to an independent committee of the Grey Wolf board has expired (OGJ Online, Mar. 8, 2001).