Analysts give Devon-Santa Fe Snyder merger high marks

Analysts took a generally positive view of Devon Energy Corp.'s bid for Houston's Santa Fe Snyder Corp. Moody's Investor's Service confirmed Devon Energy Corp., Oklahoma City, ratings (senior unsecured Baa2) and placed the ratings of Santa Fe Snyder Corp. (senior unsecured Ba1) on review for possible upgrade following Devon's announced purchase of Santa Fe Snyder for about $3.35 billion in stock and assumed debt.

May 30th, 2000


Analysts took a generally positive view of Devon Energy Corp.'s bid for Houston's Santa Fe Snyder Corp.

Moody's Investor's Service confirmed Devon Energy Corp., Oklahoma City, ratings (sr. unsecured Baa2) and placed the ratings of Santa Fe Snyder Corp. (sr. unsecured Ba1) on review for possible upgrade following Devon's announced purchase of Santa Fe Snyder for about $3.35 billion in stock and assumed debt (OGJ Online, May 26, 2000).

Moody's said the ratings confirmation takes into consideration management's commitment to maintaining a conservative balance sheet. Although Devon has historically kept financial leverage at conservative levels, immediately following the close of the merger, leverage will be above those levels, Moody's said.

However, the combined entity is expected to generate substantial free cash flow, and Moody's expects those funds will be used to bring debt levels down within a range more compatible with the assigned Baa2 rating. The ratings confirmation also reflects the potential operational synergies and cost savings expected to result from the increased presence the merged company will have in the Permian basin, Rocky Mountains, and Gulf of Mexico.

Meanwhile, Irene Haas, a financial analyst with Sanders Morris Harris Inc., Houston, called Devon's timing "superb" and raised the earnings target for the combined company in 2000 to $3.04/share, up from $2.89/share for Devon on a stand-alone basis. She also raised the target stock price to $71/share from $65/share.

"This is another classic 'bottom-fishing' acquisition for Devon," she said in notes on the buyout. Santa Fe Synder's stock price was lagging compared to other exploration and production companies. She said the merged company will create a first-class North American producer and, with a market capitalization of roughly $7.3 billion and a debt-to-book capitalization of 38%, the "all-in" cost structure after the merger should be a lean "less than $13/bbl."

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