Devon and PennzEnergy Would Create Top-10 Independent
Devon Energy Corp. and PennzEnergy Co. announced plans to merge
yesterday. While the deal was generally cheered by analysts, some
criticized PennzEnergy Chairman James L. Pate for letting the
company go too cheaply without considering other options. The
announcement also raised the hackles of PennzEnergy investors.
Houston-based PennzEnergy and Devon of Oklahoma City, OK, would
merge into a new Devon Energy Corp. PennzEnergy shareholders would
receive 0.4475 shares of common stock of the new company for each
PennzEnergy common share. Each share of Devon common stock would be
converted to one share of new Devon. As a result, PennzEnergy
shareholders would own about 31% of the combined company, and Devon
shareholders would own about 69%. The deal would create an
international oil and gas company with an equity market
capitalization of about $2.6 billion. Total enterprise value would
be about $4.7 billion. The company would rank in the top 10 of all
U.S.-based independent oil and gas producers in terms of market
capitalization, total proved reserves and annual production. The
combined company would have proved reserves of about 2.1 Tcf of gas
and 318.5 million barrels of oil, or 660 million Boe and would have
core operations onshore U.S., in the Gulf of Mexico and in Canada
and substantial international assets, highlighted by interests in
The merger is expected to be non-taxable to shareholders. Boards
of each company approved the merger, which is subject to
shareholder and Federal Trade Commission approval. The combined
company would be headquartered in Oklahoma City, with operating
offices in Oklahoma City, Houston, Denver and Calgary.
Analysts participating in a Thursday conference call with
managements of both companies had enthusiastic cheers for Devon,
but a couple had sharp words for the deal and PennzEnergy's Pate.
"You made it clear that you not only were not willing to shop
the company but that you did everything to avoid doing that," one
analyst told Pate during the call. "And other than your [continued]
current employment, I don't feel we gain as PennzEnergy
shareholders. I will tell you that we definitely will be voting
against the deal.
"What Mr. Pate has done here has been a pattern for a couple of
years. abrogating his obligations to shareholders here is clear.
And we will be voting against this transaction. I think that
everyone looking at this should not be assuming this combination is
going to go through because what was done here is wrong, and I'd
ask Mr. Pate why you would have so clearly avoided the potential to
explore what alternatives would be available in a sale before
making this decision."
Pate countered that alternatives were explored, "but our
alternatives were not to sell the company. We looked at a number of
merger opportunities, strategic mergers, acquisitions and other
opportunities to grow the company. The company is not for sale, and
this appeared to us to be a very, very attractive opportunity to
get a very solid asset base in North America, to be a major player
in the North American gas market, to de-leverage the company and
gain financial flexibility and to get a management with a
demonstrated track record of delivering shareholder value.
[Devon's] valuation, of course, is much higher than ours. Their
cash flow multiple is much higher and part of this transaction
anticipates that PennzEnergy is going to get an uplift in its
valuation as a result of all the things that I mentioned."
The analyst was not placated. "The rights of shareholders and
shareholder value has never been something that's important to you,
and I don't say that lightly."
Similar displeasure could be found on an Internet message board
devoted to PennzEnergy. "Pate is not to be trusted, but he sure is
smart enough to take care of himself. Chairman of the board of the
combined company is bound to make him a few bucks," wrote one
poster. Another fretted that the deal links the price of
PennzEnergy shares to that of Devon shares. "If [Devon's] stock
drops back to its normal valuation, do not underestimate the
potential financial fiasco to [PennzEnergy] shareholders."
The deal's critics found suspicious the timing of a Kerr-McGee
announcement that it is reviewing its investment in Devon Energy.
Kerr-McGee holds 9,954,000 shares, about 20%, of Devon common
stock. Kerr-McGee executives Luke R. Corbett, Tom J. McDaniel, and
Lawrence H. Towell resigned from the Devon board of directors.
Kerr-McGee's shares in Devon are subject to transfer limitations
set forth in Devon's December 1996 standstill agreement with
Kerr-McGee, Devon said. In 1996, Kerr-McGee's North American
onshore assets were merged into Devon.
Devon and PennzEnergy executives said the Kerr-McGee executives
were excluded from merger negotiations and were finding out about
the deal concurrent with the investment community.
Combined, Devon and PennzEnergy expect to realize cost savings
of $50-$60 million annually. Reductions are expected in operating,
general and administrative, interest and exploration expenses.
J. Larry Nichols, Devon president and CEO, will be president,
CEO and a director of the combined company. Pate will serve as
chairman of the board. Devon's executive staff will continue in
their current capacities. PennzEnergy also will contribute selected
executive staff. Devon and PennzEnergy each will designate seven
members to serve on the combined board of directors. John W.
Nichols, Devon's current chairman and Larry Nichols' father, will
serve as chairman emeritus.
Although he participated in the conference call, no mention was
made of PennzEnergy CEO Stephen D. Chesebro' and his future with
the company during the call or in the press release. "I get the
feeling that Chesebro (sic) is dead set against this merger,"
posited one investor posting on the Internet. "I think Pate is the
only one who thinks this is such a great idea." A PennzEnergy
spokeswoman reluctantly told NGI that Chesebro' will be leaving the
company to pursue other interests.
Highlights of the combined company include the following: a
proved reserve base of about 660 MMBoe (52% gas); U.S. proved
reserves of 423 MMBoe; Canadian proved reserves of 144 MMBoe; net
daily production of 230,000 Boe (60% gas); a large inventory of
exploration opportunities with an aggregate 15 million net
undeveloped acres of leasehold; expected cost savings of $50-$60
million/year from reductions to operating, general and
administrative, interest and exploration expenses.
The merger is expected to be accounted for as a purchase. The
company expects to incur a one-time, non-cash charge to earnings
due to full-cost ceiling limitations related to purchase accounting
adjustments. The charge is estimated to be in the range of
$350-$500 million after-tax, depending upon commodity prices.
Completion of the merger is expected in the third quarter of 1999.
PennzEnergy shares closed down 1/8 yesterday at 14 « in trading
that was nearly nine times normal volume. Devon shares closed up 2
¬ at 33 _ in trading that was nearly five and a half times normal