Newfield Exploration to acquire EEX in $640 million deal

June 4, 2002
Newfield Exploration Co., Houston, has signed an agreement to acquire EEX Corp., also of Houston, in a deal valued at $640 million.

By OGJ editors

HOUSTON, June 4 -- Newfield Exploration Co., Houston, has signed an agreement to acquire EEX Corp., also of Houston, in a deal valued at $640 million. The transaction—which will include the assumption of debt, net of cash, in addition to other existing obligations—is expected to close in the third quarter, subject to the approval of EEX's common shareholders and other regulatory approvals, Newfield said. Upon closing of the deal, EEX will become a wholly owned subsidiary of Newfield.

Newfield and EEX executives are touting the merger as being "very complementary" to both companies' sets of assets. "EEX's onshore properties are located primarily in our South Texas focus area," noted Newfield Pres. and CEO David A. Trice. "Our combined operations will make us one of the largest independent producers in this prolific natural gas basin," he said.

The transaction also will provide Newfield entry into the deepwater Gulf of Mexico, Trice said. "Over the past year, we have recruited and developed a deepwater team at Newfield and this acquisition now provides a significant property base," he said.

Deal details
Both companies' boards have approved the merger agreement, under which EEX's common shareholders will receive 0.05703 share of Newfield common stock for each EEX common share. EEX's preferred stockholders, meanwhile, will receive a total of 4.7 million shares of Newfield common stock.

Newfield will issue 7.1 million shares—or 12.4% of its outstanding common stock on a fully diluted basis—following the transaction's close. Newfield also will assume $360 million in EEX debt. After the deal closes, Newfield will have 56 million shares outstanding and a total enterprise value of $2.8 billion, based on the company's May 29 closing price.

In addition, in lieu of receiving Newfield stock, EEX's common shareholders will have the option of receiving units in a new trust. About 42.5 million trust units will be available, Newfield explained. For each of these trust units that an EEX shareholder chooses to receive, the number of Newfield common shares that the shareholder would have otherwise received will be reduced by 0.00054 share.

"The trust will own overriding royalty interests in future production from intervals generally below 20,000 ft from certain Gulf of Mexico lease blocks in which EEX owns or may acquire an interest," Newfield said, adding that, currently, there is no production associated with the royalty interests.

The deal constitutes Newfield's largest acquisition to date, the company said. Early last year, the company purchased private, independent exploration and production company Lariat Petroleum Inc. for $333 million (OGJ, Jan. 15, 2001, p. 28).

Newfield expects to decrease EEX's current general and administrative costs by about 50%, the company said.

Acquired assets
Of the 68 deepwater blocks held by EEX in the Gulf of Mexico, 49 are in a partnership with a unit of Royal Dutch/Shell Group, Trice said. Among its newly acquired Gulf of Mexico acreage, Newfield will gain from EEX interest in several undeveloped discoveries, including those in the Llano basin in the gulf's Garden Banks area."

Also acquired is EEX's 20% interest in Devil's Island prospect on Garden Banks Block 344 in the gulf. Earlier this year, Devil's Island operator Amerada Hess Corp. announced an oil discovery with the GB 344 No. 4 well (OGJ, May 27, 2002, p. 9).

Other gulf assets include the Garden Banks Cooper production facility and its related equipment, fee minerals, and corporate tax attributes. Among the assets acquired from EEX, Newfield said that it plans to sell a floating production system and associated pipelines in the gulf's Auger basin.

Following announcement of the transaction, credit rating agency Standard & Poor's said that Newfield's rating would remain unchanged at BB+.

"The transaction will cause almost all of Newfield's credit metrics to deteriorate, as total debt will rise by about 70% while production will increase only by 25%," S&P said. "However, Newfield had built a cushion into its ratings to accommodate acquisitions such as that of EEX. Despite the increase in debt leverage, Newfield's total debt to [earnings before interest, tax, depreciation, and amortization] still should remain below 1.5 times in 2002, which is consistent with the ratings category," S&P noted.

"Nevertheless," S&P concluded, "until Newfield materially deleverages from this transaction, future transactions will need to be financed conservatively or else possibly trigger a ratings downgrade."