Upstream News: Petrohawk-KCS deal called ‘merger of equals’

The combined company will have an enterprise value of about $3.7 billion, says Floyd C. Wilson, Petrohawk chairman, president, and CEO. He will continue in this role with the new company, which also will be called Petrohawk Energy Corp.

Two KCS senior executives will play major roles in the new company. James Christmas will serve as vice chairman, and William Hahne will become executive vice president and COO. Following the completion of the merger, the company will have nine directors - five nominated by Petrohawk, including Wilson, and four nominated by KCS, including Christmas.

“What is extraordinary is the degree of geographic fit,” says Jon Hughes, co-head of investment banking at Petrie Parkman & Co., which assisted Petrohawk in the transaction by providing a fairness opinion. “It is rare to find two companies with such an unusually good knowledge of the other’s assets, primarily because they are operating in many of the same basins.”

The agreement has attributes of both a merger and an acquisition, says Hughes. “There is a cash component (Petrohawk will pay roughly $1.6 billion in cash and stock to KCS stockholders), as in an acquisition - one company paid, the other received. However, KCS will have people on the board of directors and in senior management at Petrohawk, which is more like a merger.”

In addition, KCS stockholders will own about 50% of the combined company.

The combination will also create one of the most concentrated set of domestic oil and natural gas assets among independent E&P companies in the US, primarily focused in the East Texas/North Louisiana, onshore Gulf Coast, Permian, and Anadarko/Arkoma regions.

The merged company will have estimated proved reserves of about 1 tcfe, of which about 68% would be classified as proved developed and about 82% would be natural gas.

Petrohawk, which ranks 38th in total assets among publicly-traded domestic producers, was 4th on the OGJ200 list of fastest-growing companies (see May OGFJ) and has been expanding quickly by acquiring companies such as Mission Resources. KCS, which ranks 51st in assets, has grown primarily by successful exploration and development activities.

Several industry observers told OGFJ that Petrohawk’s Wilson is very focused on shareholder value, and they would not be surprised to see the newly combined company become a strong acquisition candidate within three years if it continues to see sustained growth of assets and reserves.

The companies expect to complete the transaction during the third quarter.OGFJ- Don Stowers

Plains’ purchase of Stone Energy for $1.5 billion may be a bargain

Houston-based Plains Exploration & Production Co. may have picked up a bargain when in April it agreed to buy Stone Energy Corp. for nearly $1.5 billion, including $483 million in assumed debt. Although the purchase price was an 11% premium over Stone’s close on the New York Stock Exchange on April 21, it was $10 a share below the stock’s 2005 peak of $62.50, set before Stone had to slash its reserves assessment last October.

Stone, headquartered in Lafayette, La., was guilty of “inadequate training and understanding of the SEC requirements for booking reserves,” according to a report by a New York law firm looking into the matter (see OGFJ, March 2006). As a result, the company, which is the subject of an SEC investigation, had to restate its financial statements from 2001 through 2004. The stock never fully recovered, and several analysts think the stock was undervalued.

This is the biggest acquisition yet for Plains, said chairman and CEO James C. Flores, a native of Lafayette and a graduate of Louisiana State University. He is confident the pluses of acquiring Stone at an undervalued price outweigh the disadvantages caused by inaccurate reserves calculations, a view that research analyst John Freeman with Raymond James shares.

Stone Energy’s stock has been overly beaten up, said Freeman.

The acquisition gives Plains, which operates primarily in California, access to the Gulf of Mexico and Rocky Mountain assets of Stone. Flores expects the Rockies, in particular, to quickly generate cash flow. Excess cash flow will be used for “debt reduction, stock repurchase, and other sound investments that benefit our shareholders,” added Flores.

Stone’s Gulf of Mexico assets were damaged by Hurricanes Katrina and Rita in 2005, and production is currently only about one-third of pre-storm levels. This is another reason Stone was such a good buy, said Flores.

When the deal is finished, Plains will have a proved reserve base of 500 million boe, according to a company statement.

David Welch, Stone’s CEO, will not join the combined company, and Stone’s Lafayette office will reportedly be closed. However, Stone CFO Kenneth H. Beer will join the new company as executive vice president and CFO. Flores will remain chairman, president, and CEO, and the Plains board of directors will remain the same.

The deal is expected to close in the third quarter. When it is finalized, Plains stockholders will own roughly 70% of the combined company, and Stone stockholders will own about 30%.

Lehman Brothers Inc. acted as lead financial advisor to Plains. J. P. Morgan also advised Plains and rendered a fairness opinion to the company. Randall & Dewey, a division of Jefferies & Company, acted as financial advisor to Stone.OGFJ - Don Stowers

Baker Hughes uses proceeds from $2.4 billion WesternGeco sale to repurchase stock

Schlumberger Ltd. has paid $2.4 billion for Baker Hughes Inc.’s 30% minority share in WesternGeco, a seismic joint venture between the two companies. The sale was completed April 28.

Houston-based Baker Hughes said it will use the net cash proceeds to repurchase stock. The company’s board of directors increased its stock repurchase authorization by $1.8 billion, approximately the net amount of the cash proceeds after taxes and normal closing adjustments.

Analyst Jeffrey B. Morrison of Standard & Poor’s in New York said the credit ratings firm views the transaction as favorable because it removes any future uncertainty with regard to conditions set forth in the WesternGeco master formation agreement that could result in Baker Hughes having to buy Schlumberger’s interests.

Baker Hughes’ financial profile, liquidity, and credit metrics should remain consistent with Standard & Poor’s expectations in the near term, after funding the repurchases, said Morrison.

WesternGeco was formed in mid-2000 through the combination of the seismic fleets, data processing assets, surveys, and other assets of Schlumberger’s Geco-Prakla unit with Baker Hughes’ Western Geophysical unit.

Commenting on the sale, Chad Deaton, Baker Hughes chairman and CEO, said, “We have been pleased with the results from WesternGeco over the last several quarters and with the performance of the WesternGeco management team. However, the $2.4 billion sales price provides us with an excellent opportunity point to exit our minority ownership position.”

Deaton added, “We remain excited about the growth in the global market for our products and services that we see continuing for the next several years. Baker Hughes will continue investing in people and technology to further our penetration of key global markets, and we maintain our intention to return cash in excess of our needs to our stockholders through our stock repurchase program.” OGFJ - Don Stowers

Apache to buy BP GoM shelf assets

Apache Corp.’s Gulf of Mexico shelf assets generate some of the highest returns in the entire company, so Apache is buying more shallow-water properties. The Houston-based independent, which ranks 9th among US producers in total assets, will pay $1.3 billion to acquire BP PLC’s interests in 18 oil and gas fields in the Gulf. BP operates 11 of the fields.

The transaction covers 92 blocks with estimated proved reserves of 27 million bbl of liquid hydrocarbons and 185 bcf of natural gas. Apache has identified 50 drilling prospects on the properties and an additional 4 million bbl of liquids and 26 bcf of gas in probable and possible reserves.

Some of the fields are subject to preferential purchase rights of other interest owners. The transaction, subject to government approvals, is expected to close by the end of June. Apache has made 5 major shallow-water acquisitions since 1999.

“The company has one of the industry’s best track records in creating shareholder value through acquiring producing properties in negotiated transactions,” wrote Oppenheimer & Co. analyst Fadel Gheit in a research report. “Over the years, (Apache) has successfully executed its strategy by growing its production and reserves efficiently in the areas where it has operating knowledge or where it can leverage its expertise,” he added.

Upon completion of the transaction, the Gulf shelf will account for 21% of Apache’s worldwide production and 15% of its reserves. The company’s core operations are in the US, Canada, Egypt, the UK North Sea, and Australia.

Following the announcement, Standard & Poor’s Ratings Services affirmed its “A-” corporate credit rating on Apache and said the outlook is “stable.”

Shares of Apache closed at $73.73 the day after the deal was announced - up 5.1% over the previous closing of $70.13.

BP has been busy cleaning up the devastation caused by the 2005 hurricanes at a substantial cost. Production and cash flow are expected to rise in 2007 as damaged fields are brought back online.

The latest sale covers BP’s last remaining properties in the Gulf’s shallow waters. BP said the deal allows the London-based company to invest in other projects that are a better fit for its global portfolio.OGFJ - Don Stowers

Pogo sells half its stake in GoM, uses proceeds to acquire Latigo

Houston-based Pogo Producing Co. acquired privately held Latigo Petroleum Inc. for a total cash purchase price of $750 million. The Latigo acquisition involves properties in the Permian Basin of west Texas and southeastern New Mexico and in the Texas panhandle area of the Anadarko Basin.

Under the agreement, Pogo will acquire 275 bcfe of estimated proven reserves on approximately 404,700 net acres. Latigo’s reserves are 49% natural gas and 51% oil. Beyond the proven reserves, Pogo believes that Latigo’s properties contain high quality probable reserves and significant exploration potential. After allocating $60 million of the purchase price to Latigo’s sizeable, as yet unexplored but prospective, leasehold acreage position and its extensive new 3-D seismic database, Pogo’s acquisition cost per estimated proven reserves, would be $2.51 per thousand cubic feet equivalent.

To fund this transaction, the company has entered into a definitive agreement to sell an undivided 50% of each and all of its Gulf of Mexico oil and gas leasehold interests to Mitsui & Co. Ltd., Mitsui & Co. (USA) Inc., and Mitsui Oil Exploration Co. Ltd. for $500 million in cash. The transaction is expected to close during June, subject to customary closing conditions.

The Gulf of Mexico sale, combined with the Latigo acquisition, marks a very significant step in solidifying Pogo’s onshore North American focus. Pogo will retain the remaining 50% interest in each of its present Gulf of Mexico properties, which will then represent, after these two transactions, slightly more than 6% of Pogo’s total proven reserves.

This sale of 50% interest in Pogo’s Gulf of Mexico assets is approximately equivalent to net production capacity, without any reduction due to continuing hurricane damage related curtailments, of 8,000 b/d of oil and 24 MMcfd of natural gas, and, according to independent engineering estimates as of December 31, 2005, approximately 143 billion cubic feet of net estimated proven oil and gas reserves expressed in natural gas equivalents.

Ratings agency Moody’s Investors Service has placed Pogo on review for downgrade. Pogo is transitioning itself through acquisitions during a time of historic up-cycle acquisition costs. Since 2004, Pogo has faced surging reserve replacement costs, inconsistent to weak organic production trends, an escalating total full cycle cost structure, and rising leverage on proven developed reserves.OGFJ - Mikaila Adams

Venoco acquires TexCal for $456 million; now largest producer in Sacramento basin

Venoco Inc. has acquired TexCal Energy (LP) LLC, an independent exploration and production company with properties in Texas and California for $456 million in cash.

TexCal’s proved reserves were 31.4 MMboe at December 31, 2005 according to a report prepared by DeGolyer and MacNaughton, TexCal’s third-party reservoir engineering firm. In addition to the proved reserves, Venoco has internally estimated an additional 22 MMboe of probable and possible reserves related to the TexCal assets. Based on the 31.4 MMboe of proved reserves, the transaction implies a cost of $14.50 per boe. Including the 22 MMboe of probable and possible reserves, the transaction implies a cost of $8.52 per boe. TexCal’s current daily net production is approximately 5,200 boe/d, implying a reserve to production ratio of 16.5 years.

In the Sacramento basin, Venoco and TexCal were the two most active drillers in 2005, drilling 21 and 18 wells, respectively. In 2005 TexCal increased its production in the basin from 4.2 million cubic feet per day (MMcf/d) in the first quarter to 17.8 MMcf/d in the fourth quarter. TexCal’s Sacramento basin acreage is concentrated in the Grimes producing area, where Venoco has been aggressively adding to its core acreage position.

Pro forma for the transaction, Venoco will have estimated total reserves of 79 MMboe, and a reserve base that is 63% oil, 52% onshore, and 64% proved developed with a proved reserve to production ratio of 12.3 years based on December 2005 production.

Venoco financed the acquisition through loans made available by the Bank of Montreal, Credit Suisse, and Lehman Brothers under its revolving credit facility and a new $350 million second lien term loan facility. In connection with the transaction, Venoco entered into a collateral trust agreement to provide liens securing its outstanding 8.75% senior notes equally and ratably with the liens securing the second lien term loan. Also related to the transaction, Venoco hedged a significant portion of projected future production through a series of swaps, collars, and puts.

Ratings agency Moody’s Investors Service changed Venoco’s outlook from stable to negative. The negative outlook reflects the material increase in Venoco’s leverage as a result of the TexCal acquisition.

Credit Suisse and Lehman Brothers were financial advisors to Venoco for this transaction. Citigroup Global Markets Inc., Merrill Lynch & Co., and Randall & Dewey (a division of Jefferies) acted as financial advisors to TexCal in connection with the transaction.OGFJ - Mikaila Adams

Lime Rock Partners sells investment in three high-growth companies

Lime Rock Partners, a private equity firm focusing on the energy industry, has sold its full investment in three high-growth energy companies, US Exploration, NATCO Group, and Roxar, as well as part of its investment in Hercules Offshore.

The four realizations, which occurred over the past two months, totaled $417 million. The firm continues to hold and invest growth capital in 21 companies in the exploration and production, energy service, and oil service technology sectors worldwide.

On February 13, 2006, Lime Rock Partners closed the $200 million sale of Roxar ASA to Arcapita Ltd., the European private equity arm of Arcapita Bank BSC, an investment firm headquartered in Bahrain.

On March 28, 2006, Noble Energy completed the acquisition of US Exploration for $411 million. In September 2003, Lime Rock Partners, Greenhill Capital Partners, and Steven Durrett acquired all the outstanding equity of US Exploration.

On April 7, 2006, Lime Rock Partners exited its convertible preferred investment in NATCO Group in a privately negotiated transaction.

Finally, on April 11, 2006, Lime Rock Partners sold part of its position in Hercules Offshore Inc. in a $346 million public offering of primary and secondary shares. The firm continues to hold approximately 21% of the total shares outstanding in Hercules Offshore.

Deutsche Bank acted as the adviser to Roxar. Petrie, Parkman & Co. acted as the adviser to US Exploration. Pickering Energy Partners brokered the sale of Lime Rock Partners’ investment in NATCO Group. Credit Suisse and Citigroup managed the public offering of Hercules Offshore shares. OGFJ - Mikaila Adams