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Energy Partners Wins Bidding for Stone Energy

New Orleans-based independent producer Energy Partners Ltd. successfully outbid Plains Exploration for the purchase of Lafayette, LA-based Stone Energy Corp. The boards of EPL and Stone approved the $2.2 billion purchase Thursday, forming a larger Gulf and Rockies E&P player with about 167 million boe in reserves (52% gas) and expected 2006 production totaling about 24 million boe.

The deal announced Friday ends months of merger negotiations, which started on April 24 when Stone announced that it would be acquired by Plains Exploration in a stock-for-stock transaction valued at $1.94 billion, including $1.46 billion in stock and $483 million in debt assumption (see NGI, May 1). EPL then chipped in with its own bid on May 25, a $2 billion offer that Stone later concluded was superior to the Plains transaction. Stone terminated its agreement with Plains on Thursday. Energy Partners will pay the $43.5 million termination fee.

Under the terms of the final deal, EPL will buy all of the outstanding shares of Stone for $51 in cash or stock at the election of the shareholder and will refinance $800 million of Stone debt. EPL will pay at most $723 million in cash. Assuming half of the shares are sold for cash, the offer is worth $48.25 per share based on EPL's Thursday closing stock price of $18.02 on the New York Stock Exchange. The price is an 18% premium to Stone Energy's closing stock price on May 24, the day before the offer was announced.

EPL Chairman Richard A. Bachmann said the deal marks "an important step forward in our strategy to become a premier Gulf of Mexico E&P company." He said the combination would expand EPL's scale and opportunities in the Gulf, "in addition to providing us with a low-cost entry into several of the most attractive basins in the Rocky Mountains and the Williston Basin."

Bachmann said the Gulf assets of the two companies are "highly complementary" and provide "significant operating and administrative synergies and associated cost savings." The companies said the combination would save about $55 million in annual expenses.

Stone CEO David H. Welch said, "EPL is the right fit for us in every way, from the location and the scope of EPL's exploration projects to its long-term strategic objectives and shared values as a Louisiana neighbor." He said in addition to receiving a substantial price premium compared to the Plains offer, Stone shareholders also would benefit from the "long-term value the combined company will create. Our employees can look forward to being part of a larger, more competitive organization with enhanced opportunities for career growth and advancement."

In March, Stone shares hit their lowest point in more than two years after the company completed a restatement of four years of earnings. Last October, Stone revised its oil and natural gas reserves downward by 171 Bcfe, triggering an informal investigation by the Securities and Exchange Commission and a class action lawsuit by shareholders (see NGI, Dec. 12, 2005).

Stone's proved reserves at the end of 2005 totaled 593 Bcfe (99 MM boe) compared to 670 Bcfe in 2004. Its reserves are located primarily in the Gulf Coast and Gulf of Mexico (76%) with the remaining 24% in the Rockies. Stone's production at the end of last year totaled about 200 MMcfe/d (58% gas) compared to 241 MMcfe/d in 2004. The decrease was attributed primarily to the impact of the hurricanes on Stone's Gulf of Mexico production.

In comparison, EPL had 59.3 MMboe of reserves at the end of 2005. Its operations focused along the U.S. Gulf Coast, both onshore in south Louisiana and offshore in the Gulf of Mexico (87% on the outer continental shelf and 10% in the deepwater).

The combined company is expected to have about 167 million boe of reserves, 86% of which are in the Gulf of Mexico and the Gulf Coast region and 14% of which are in the Rocky Mountains and Williston Basin in Montana and the Dakotas.

The combination expects its production to grow about 9% this year. In 2005, the two companies together would have been the third most active driller of operated wells on the Gulf of Mexico Shelf. They have a large portfolio of Gulf of Mexico prospects and an expanded 3-D seismic database and inventory of undeveloped Gulf acreage.

Under the agreement, the company will continue as EPL with its headquarters remaining in New Orleans. Bachmann will remain chairman and CEO along with EPL's current management. EPL will keep Stone Energy's offices in Lafayette and Denver and will combine the officers of both companies in Houston.

The transaction is expected to close in the fourth quarter, and is expected to be immediately accretive to EPL's cash flow per share. EPL expected to use its larger cash flow for its exploration and development program and to reduce debt to 50% of book capitalization by the end of 2008. The company also will undertake a hedging program in conjunction with its plan to reduce debt.

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