The fevered pace of merger and acquisition activity in the North American upstream oil and gas industry continues with the announcement last week of two multibillion-dollar deals.
Devon Energy Corp., Oklahoma City, said it will acquire Calgary-based Ander- son Exploration Ltd. in a $4.6 billion deal that will give it the most North American oil and gas reserves of any independent, Devon said.
Meanwhile, Global Marine Inc., Hous- ton, and Santa Fe International Corp., Dallas, said they plan to merge in a stock-for-stock transaction that will create the world's second largest offshore drilling contractor. Transocean Sedco Forex Inc., Houston, is the largest offshore drilling contractor.
Devon-Anderson deal
This latest acquisition comes on the heels of Devon's Aug. 14 agreement to buy Houston-based Mitchell Energy & Devel- opment Corp. for $3.5 billion in cash and stock (OGJ, Aug. 20, 2001, p. 37).
The Mitchell Energy acquisition by itself would make Devon the second largest US independent gas producer, after Anadarko Petroleum Corp., Houston. However, successful completion of both transactions will make Devon the largest independent producer of oil and natural gas in North America, Devon claimed.
Both transactions are expected to close by yearend. Neither deal is conditional upon the other.
Through the Anderson acquisition, Devon would get additional proved reserves estimated at 532 million boe, plus 8 million net undeveloped acres. That would increase Devon's total proved reserves to 2 billion boe, an increase of 35%. Devon's North American reserves would increase to 87% of the company's worldwide reserves, it said.
As a result, "Devon will be in position to deliver strong production and reserve growth for years to come," said J. Larry Nichols, chairman, president and CEO.
Both companies' boards have unanimously approved Devon's cash offer of $25.80/share, or $40 (Can.), for Anderson's stock. The price/share also includes assumption of $1.2 billion of debt and other obligations.
The company allocated $680 million of the aggregate purchase price to Anderson's undeveloped acreage and seismic data, officials said.
"Expanding our presence in Canada has been an important objective for Devon," said Nichols. "Anderson was at the top of our list of acquisition opportunities."
Anderson was the most active exploratory driller in Canada over the last 2 years. J.C. Anderson, chairman and CEO of the Canadian firm, "has built an exceptional, gas-weighted production platform with powerful exploration potential," Nichols said. "Combining Anderson with our existing Canadian organization firmly establishes Devon in Canada," he said.
Anderson's undeveloped Canadian acreage includes 6 million acres in the Western Canadian Sedimentary Basin and 2 million acres in northern Canada, with holdings in the Northwest Territories, Yukon Territory, the Mackenzie Delta, and the Beaufort Sea.
Anderson's properties complement Devon's existing Canadian holdings in the Peace River arch, Foothills, and Northern Plains areas, officials said. Anderson will be merged with Devon's subsidiary in Calgary.
"By combining our existing Canadian staff with Anderson's, we will build one of the strongest workforces in the Canadian oil patch," said John Richels, president and CEO of Devon's Canadian subsidiary. "We expect a very smooth integration of Anderson's staff and properties and anticipate a great future for Devon in Canada."
George P. Mitchell, founder, chairman, and CEO of Mitchell Energy, said, "Speak- ing as someone who looks forward to becoming Devon's largest shareholder, I fully support the acquisition of Anderson. This transaction creates the preeminent North American independent."
Meanwhile, Devon and Mitchell plan to amend their preliminary joint proxy statement and prospectus, filed with the US Securities and Exchange Commission, to include the pro forma effects of the Anderson acquisition.
Devon expects the acquisition of Anderson to be accretive to reserves, production share, and cash margin per share and dilutive to earnings per share in the near term.
Its North American gas production would increase to 2.2 bcfd from 1.6 bcfd and liquids production to 180,000 b/d from 125,000 b/d, making Devon the largest independent producer of both gas and liquids in North America, said officials.
Devon arranged to finance the purchase of Anderson and the cash portion of its Mitchell Energy acquisition with a 5-year amortizing loan facility of about $6 billion. The company also ex- pects to issue long-term debt to prepay the 2-3 years of amortization of the 5-year loan facility.
Meanwhile, Devon suspended its share repurchase program.
If the deal fails to go through, Anderson is obligated under certain circumstances to pay Devon a noncompletion fee of $135 million, or $210 million (Can.). Anderson officials agreed not to solicit further offers but reserved the right to respond to a superior proposal, should one be forthcoming.
The transaction is subject to US and Canadian regulatory approvals and other customary closing conditions.
Asset sale planned
Devon said the company plans to take an across-the-board look at its newly expanded company to reduce debt incurred from the recent purchases of Anderson and Mitchell Energy.
"There will be a rigorous review of assets," Nichols told the Lehman Bros. CEO Energy Conference last week. Nichols said his management team "has a pretty good idea what those assets are," but he declined to reveal what properties the company is planning to offer for sale.
Devon plans to pay for Anderson through cash flow from operations and about $1 billion in what it calls "noncore" property sales.
But companies should not expect to look for any quick bargains any time soon, Nichols suggested. There will be no "fire sales," he said.
The company was "staggered [to discover] how cheap the debt was" to finance the Anderson deal. Under the terms of the transaction, Devon "has plenty of time-3 years-before we even have to think about selling assets," Nichols told the group of institutional investors.
To help finance its latest acquisition, Devon plans to access the 144A bond market and issue long-term debt that matures at 10-30 years. Proceeds from the debt offering would be used to prepay the first 2-3 years of amortization; the company hopes to maintain its investment grade rating as well and has planned meetings with credit risk rating agencies Moody's and Standard & Poor's.
Analysts have speculated that a possible asset sale by Devon might include a portion of the company's limited international portfolio. Of the 2.044 billion boe in proven reserves held by Devon, 87% are in North America. The company has interests in West Africa, the South China Sea, and Azerbaijan, along with gas sales in Indonesia.
Nichols declined to detail if any international assets may be on the table. He said that the company's international plays were providing "meaningful" growth but suggested that Devon is not inclined to go exploring all over the globe.
"We plan to be narrowly focused" and not go "head to head" with the majors, Nichols said.
Global-Santa Fe merger
Global Marine's merger with Santa Fe is subject to stockholder and government approvals. It is due to close by yearend.
The merged $6 billion company, GlobalSantaFe Corp., will be headquartered in Houston and will trade on the New York Stock Exchange. The companies said that by combining complementary resources, GlobalSantaFe will improve operational scale and market coverage. It will have one of the industry's youngest, most diversified, and technologically advanced drilling fleets, the firms said.
Possible combination of the two companies apparently has been discussed for a long time. "Sted [Garber, president and CEO of Santa Fe] and I are the third consecutive set of CEOs who have pursued this merger," said Robert E. Rose, chairman, president, and CEO of Global Marine, in a teleconference call early last week.
"This is the best possible merger and the best time for it," Garber said. The merger is driven in part by recent megamergers among major oil and gas producers who now want to work with a smaller number of large service contractors. "This puts us in a position to provide what they want, where they want, when they want it," said Garber.
The new company will operate more than 100 rigs in the world's key drilling markets, owning a fleet of 59 offshore and 31 land drilling rigs and operating 13 rigs for others. The offshore rigs consist of 45 jack ups, 9 semisubmersibles, 4 drillships, and 1 platform rig. The newly formed company also will be a major provider of drilling management services.
Rose will be chairman, and Garber will be president and CEO of the combined company. Gordon Anderson, Santa Fe chairman, will serve on the 14-member board of GlobalSantaFe.
There is little overlap between Global Marine-with a major presence in the Gulf of Mexico and some non-US operations-and Santa Fe, which is entirely non-US in scope. The combined company's operations will be 25% Gulf of Mexico and 75% non-US, "which is an extremely good balance," said Garber.
Under the deal, Global Marine stockholders will receive 0.665 shares of newly issued GlobalSantaFe stock for each share of Global Marine and will own 50.6% of the combined company. Gains on the transaction will be taxable to Global Marine shareholders.
The transaction will not be taxable to Santa Fe shareholders, who will retain their existing shares and will own 49.4% of the combined company. GlobalSantaFe will have 233 million shares outstanding, providing "a very liquid trading opportunity for shareholders," Garber said. The transaction is expected to be modestly accretive to GlobalSantaFe's earnings and substantially accretive to cash flow in 2002.
For the 12 months ended June 30, the two companies combined had $2 billion in geographically diverse revenues. Fol- lowing the transaction, GlobalSantaFe will have pro forma book equity in excess of $4.5 billion and debt to total capitalization of less than 18%. Both managements expect GlobalSantaFe to continue Santa Fe's dividend policy of $0.13/share/year. They also expect GlobalSantaFe to achieve cost savings and operating synergies of $25 million/year by the end of 2002.
Rose said, "This transaction-which is a merger of equals in every sense of the word-brings together two of the most talented and respected management teams in our industry."
Nader H. Sultan, deputy chairman and CEO of Kuwait Petroleum Corp. (KPC), said his firm supports the merger. KPC owns 37.7% of Santa Fe through a subsidiary and will have 18.7% of the new company.
Global Marine operates 33 jack ups, semisubmersibles, and dynamically positioned ultradeepwater drillships. Santa Fe has 26 marine drilling rigs, including semis and premium and heavy-duty, harsh-environment jack ups, and 31 land drilling rigs. It also operates 13 rigs for others.