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Stone Throws $1.8B Merger Offer to Bois d'Arc

Stone Energy Corp., which was on the losing end of two merger attempts in 2006, has trained its sights on acquiring Houston-based Bois d'Arc Energy Inc. in a transaction estimated at $1.8 billion. The combination would give Stone a solid Gulf of Mexico (GOM) exploration portfolio 55% weighted to natural gas, around 300 MMcfe/d in production, 700 Bcfe-plus of estimated proved reserves and 275 Bcfe of estimated probable reserves.

Under the terms of the definitive merger agreement, Bois d'Arc stockholders would receive $13.65 in cash and 0.165 shares of Stone common stock for each share of Bois d'Arc common stock. Stone's share price ended Tuesday at $67.85; Bois d'Arc closed at $25.98.

"Bois d'Arc is an outstanding fit with Stone given the complementary asset bases, strategies and skill sets of the two companies," said Stone CEO David Welch last week. "Stone is a strong exploitation and development company and combined with Bois d'Arc's outstanding inventory of shelf exploration prospects, the combined company will be a leading Gulf of Mexico producer."

Stone would remain headquartered in Lafayette, LA, and Welch would continue as CEO. The transaction is expected to close by the end of September.

Based on internal estimates by both companies, combined average production for 2008 would be 290-330 MMcfe/d. Stone estimated that its output this year would be 175-200 MMcfe/d, while Bois d'Arc's estimated production for the year is 115-130 MMcfe/d. At the end of 2007 Stone's proved reserves were 403 Bcfe; Bois d'Arc's were 335 Bcfe. Stone's probable reserves at the end of 2007 were estimated at 148 Bcfe and Bois d'Arc's were 127 Bcfe. Stone's reserves currently are weighted 53% to gas; Bois d'Arc is 57% weighted to gas.

In addition to the production and reserves that Stone would acquire, the producer also would have a multi-year exploration prospect inventory, 3-D seismic in the GOM and a material leasehold of more than 800,000 net undeveloped acres.

"Stone has the cash flow as well as the depth of personnel and the infrastructure in place to effectively capture the full value of Bois d'Arc's extensive prospect inventory," said Bois d'Arc CEO Gary Blackie. "The case for combining the two companies is extremely compelling to the Bois d'Arc stockholders."

Stone would fund the transaction using existing cash on hand and borrowings from a proposed $700 million credit facility underwritten by Bank of America NA, and by issuing 11.3 million shares of its common stock.

The boards of both companies approved the merger agreement, and Comstock Resources Inc., which holds 49% of the outstanding shares of Bois d'Arc, also agreed to vote in favor of the combination. Completion of the transaction is subject to approval by regulators and the companies' stockholders. Post closing, Stone stockholders would own around 72% of the combined company, and the Bois d'Arc stockholders would have a 28% stake. Comstock would own a 13% stake in the company through its Bois d'Arc interest.

Blackie and some "key" Bois d'Arc employees also entered into a participation agreement with Stone, under which Blackie and his team would generate exploration prospects in the GOM "drawing on their extensive geological expertise in the region." Stone would provide overhead support and advance the funding needed to conduct exploration activities. Stone would be entitled to a 50% working interest in each prospect generated.

Tudor, Pickering, Holt & Co. acted as financial adviser to Stone. Scotia Waterous (USA) Inc. and Raymond James & Associates Inc. acted as financial advisers to Bois d'Arc.

Stone, which has been in operation since 1973, considered and then rejected a $1.9 billion merger offer by Plains Exploration & Production after Energy Partners Ltd. (EPL) offered $2.2 billion to merge (see NGI, June 26, 2006). However, EPL withdrew its offer after it was pursued later that year by Australia's Woodside Petroleum Ltd. (see NGI, Oct. 16, 2006). Stone, as part of a restructuring move, last year sold its Rocky Mountain properties to Newfield Exploration Co. for $575 million cash to concentrate its exploration in the GOM (see NGI, May 21, 2007).

The market was not enthusiastic about the transaction, and Stone's share price fell nearly $6/share between Wednesday, the date of the announcement, to Friday. Friedman, Billings, Ramsey & Co. Inc. analysts said the negative reaction "was driven by the high $5.37/Mcfe purchase price of solely GOM shelf reserves, the challenges to a business model that is over-reliant on shelf GOM, and the potential dilution to Stone's existing Marcellus Shale acreage. We would agree with all of the above."

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