Post-merger Anadarko gains ground in prolific producing regions

“Kerr-McGee and Western Gas Resources strengthen Anadarko’s position on all three counts, with captured growth projects that are consistent with our core skill sets. The transactions enable us to create a more focused operating strategy with a larger and lower-risk asset base,” he continued.

Anadarko will finance the acquisitions through a $24 billion, 364-day committed acquisition facility provided by UBS, Credit Suisse, and Citigroup. The company is also planning to hedge 75% of the acquired production through the end of 2008, primarily with three-way collars.

Anadarko plans to use proceeds from asset sales, free cash flow from operations, and the issuance of equity to reduce debt over the next 18 to 24 months. During a media call held June 23, Anadarko CFO Al Walker added that the company plans to “restore the debt to capitalization ratio to 40% over the same period.”

Anadarko plans a thorough review of the consolidated assets to select divestiture candidates, with the dual goals of paring acquisition-related debt and refocusing the portfolio.

If you ask Wood Mackenzie, Kerr McGee’s operations in China and Brazil, as well as Anadarko’s operations in Venezuela, Brazil, Qatar, and Egypt could be on the disposal list. The firm also believes that disposal of Algerian operations would free up a large amount of cash and re-focus Anadarko as a pure North American play.

What is known now is that Anadarko intends to sell its wholly-owned subsidiary, Anadarko Canada Corp., as part of its portfolio refocusing efforts. Proceeds from the expected sale would be used to retire debt associated with the acquisitions.

Commenting on the divestiture, Hackett said, “Properties like ours are in high demand in Canada right now, attracting valuations significantly above those reflected in our stock price.” He said the divestiture is expected to proceed quickly, as the company already had received unsolicited expressions of interest from multiple parties.

Anadarko Canada currently produces about 340 million cubic feet equivalent per day, about 85% of which is natural gas. Year-end 2005 proved reserves in Canada totaled nearly 1.6 trillion cubic feet equivalent.

Along these lines, Anadarko recently agreed to sell Bear Head LNG Corp., a wholly-owned subsidiary that is developing an LNG receiving terminal at Point Tupper, NS.

Under the agreement with US Venture Energy, a private equity firm, Anadarko will receive $125 million and an 18-month option to secure up to 350 MMcfd of throughput capacity at competitive rates.

Kerr-McGee acquisition details

Anadarko will acquire Kerr-McGee in an all-cash transaction totaling $16.4 billion, or $70.50 per Kerr-McGee share, plus the assumption of net debt and other liabilities estimated at $1.6 billion.

“This compelling offer represents a 40% premium to yesterday’s closing stock price and immediately recognizes the value of Kerr-McGee’s strategy and assets for our shareholders,” said Luke R. Corbett, Kerr-McGee chairman and CEO. He says the merger “creates the largest US-based independent exploration and production company.”

Kerr-McGee’s year-end 2005 proved reserves (excluding pending Gulf of Mexico shelf divestitures) totaled 898 MMboe, of which approximately 62% is natural gas. Proven undeveloped reserves represented 30% of the total. Production in 2006 is expected to be about 92 MMboe, with natural gas representing approximately 60% of the total.

Anadarko expects to ultimately recover more than 3.1 billion boe on the Kerr-McGee properties, at a full-cycle cost of approximately $39.2 billion ($12.40 per boe), including the acquisition cost.

Kerr-McGee’s core properties are located in the deepwater Gulf of Mexico (GoM) and onshore in Colorado and Utah. They include 504 deepwater GoM blocks, encompassing seven operated and three non-operated producing fields, three operated and five non-operated discoveries in varying stages of development, and four additional prospects that will be drilled this year.

In Colorado, Kerr-McGee holds 451,000 net acres in the Wattenberg natural gas play, located largely on the Land Grant, where Anadarko owns the royalty interest. In Utah, Kerr-McGee holds 237,000 net acres in the Uinta basin’s prolific Greater Natural Buttes gas play.

For this transaction, JP Morgan and Lehman Brothers acted as financial advisors and Covington & Burling acted as legal counsel for Kerr McGee.

Western Gas Resources acquisition details

In a separate deal, Anadarko has agreed to acquire Western Gas Resources Inc. in an all-cash transaction totaling $4.7 billion, or $61.00 per Western Gas Resources share, plus the assumption of debt and other liabilities estimated at $600 million.

Western Gas Resources’ year-end 2005 proven reserves totaled 153 MMboe, with proved undeveloped reserves representing 57% of the total, while 2006 production is expected to total about 12.5 MMboe.

Western Gas’ CBM properties within the Powder River basin are estimated to hold about 9 tcf of original gas in place and are directly adjacent to Anadarko’s assets in this developing play. Western Gas also has a 10% average working interest in their Pinedale/Jonah joint ventures, which encompass fields totaling more than 40 tcf of original estimated gas in place.

Anadarko expects combining its properties with Western’s will accelerate the development of these natural gas resources and produce strong growth through the end of the decade, and possibly longer, with more than 12,000 identified drilling locations in inventory.

“Clearly Anadarko has attached a major value to the upside potential in Western Gas Resources’ portfolio,” said Derek Butter, head of Wood Mackenzie’s corporate analysis team.

Morgan Stanley & Co. Inc. and Petrie Parkman & Co. Inc. are serving as Western’s financial advisors, while Skadden, Arps, Slate, Meagher & Flom LLP is serving as the company’s legal advisor.

According to Andrew Strachan, research manager at Wood Mackenzie, the mergers are an excellent strategic fit for Anadarko - comparable to the ConocoPhillips acquisition of Burlington Resources earlier this year. According to the latest analysis, “Anadarko now moves ahead of ConocoPhillips” on the basis of acreage, reserves, and value, in the Rocky Mountain region rankings. ConocoPhillips remains in front for production, but strong growth in the next few years by Anadarko could change things by 2008.

Butter also compared Anadarko’s transactions with that of ConocoPhillips, noting, “Anadarko has picked up a high-quality portfolio at a long-term gas price assumption of $5.20/mcf. By comparison, we calculated that ConocoPhillips’ acquisition of Burlington implied a long-term gas price of around $7.15/mcf.”

In addition to boosting the company’s position in the Rockies, Wood Mackenzie estimates that the deepwater GoM commercial assets of post-merger Anadarko will be over $10 billion. This places Anadarko “third behind BP and Shell in terms of value, but ahead of other deepwater Gulf of Mexico players BHP Billiton, ExxonMobil, and Chevron,” says Strachan.

Credit Suisse and UBS acted as financial advisors, Goldman Sachs provided the fairness opinion and Akin Gump Strauss Hauer & Feld LLP acted as legal counsel for Anadarko in both transactions.

What does it all mean?

It is unusual for two huge deals to be announced at the same time. The perceived messages by industry participants are varied. According to Allen Brooks, managing partner of Parks Paton Hoepfl & Brown, “This may represent the early phase of a significant consolidation effort within the oil and gas producing sector.”

“Buy or be bought” is a phrase heard around the oil patch lately. Transactions such as the ConocoPhillips/Burlington Resources deal, the Energy Partners/Stone Energy deal, and the battle over Houston Exploration are just some of the buys bringing speculation to the forefront.

While it was rumored that Anadarko was being “eyed” as a takeover candidate in recent years, Hackett says that the deals were not completely defensive in nature. He said that the company always “considers what is in the best shareholders’ interest,” and that the company wants to “grow and produce new energy for the world.”

Another concern is that of job security. As of press time, no concrete plans have been made concerning the fate of employees of the acquired companies. When asked about comparisons to the Anadarko layoffs of 2003, Hackett commented that the company “is not looking at this as a cost-saving vehicle,” adding that Anadarko will “keep as many people as we can.”

In the end, 75 year-old Kerr McGee and 35 year-old Western Gas Resources will be dissolved, but as Hackett noted to end the June 23 media call, the “things that made it special - the people and ideas - will still be there to make the combined company better.”