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Industry Buzzes About Possible Noble, Ocean Energy Union

Industry Buzzes About Possible Noble, Ocean Energy Union

The latest buzz in the oil-patch and on Wall Street is that independent producer and marketer Noble Affiliates Inc. of Ardmore, OK, may acquire competitor Ocean Energy Inc. in a transaction that would catapult the combined company into the ranks of one of the top natural gas producers in the United States.

There have been "very, very loud rumors" of a possible deal between the two independent oil and gas producers for about two weeks, said Irene Haas, an E&P analyst with Sanders Morris Harris in Houston. In fact, shares of Noble Affiliates and Houston-based Ocean Energy traded at new 52-week highs last Thursday and Friday, respectively, amid speculation of a pending marriage. By the end of the week, Ocean Energy stock was trading at around $16 and Noble was hovering at the $40 mark.

At the same time, there was renewed speculation late last week that Texaco Inc. was being eyed as a takeover target by Royal Dutch/Shell Group and Chevron Corp. A rise in the White Plains, NY-based company's stock, which was trading between $56 and $57 on Friday, and a marked increase in daily trading volumes fueled the reports.

Is there any basis for the scuttlebutt about Noble and Ocean Energy? Financial analysts who cover the companies concede they have no direct knowledge that a deal is imminent. "I haven't confirmed anything with the company [Ocean Energy]. Nothing's a done deal until signatures are on paper......[But] I think wherever there's smoke there's usually fire," said Lewis Ropp, an energy analyst for Dallas-based Frost Securities, which tracks Ocean Energy. "I wouldn't be surprised to hear something very shortly. There probably are serious discussions taking place now."

The companies won't confirm anything. "We can't comment on a rumor," said Ocean Energy spokeswoman Janice Aston White. She noted reports of a Noble-Ocean Energy union have been rampant for a "couple of weeks

A Noble-Ocean Energy company would provide "synergies and cost savings" of as much as $100 million for the two producers, Ropp told NGI. He noted that both Noble and Ocean Energy are significant gas producers, with gas accounting for about 70% of Noble's production and 50% of Ocean Energy's production. Also, their E&P activities "overlap in core areas" --- the Gulf of Mexico, West Africa and Israel.

Ropp believes a marriage with Noble Affiliates would appeal to Ocean Energy, based on the interest that Ocean Energy showed when Anadarko Petroleum Corp. announced plans to buy Union Pacific Resources. Ocean Energy was "very supportive of that" deal because it believes further consolidation of the production sector is warranted to boost competition.

Also, Ropp noted Ocean Energy may view this opportunity as another Seagull Energy, which it merged with in 1999. "I think that they could repeat that" success, he said. If Noble should make a play for Ocean Energy, it would be the third merger transaction that Ocean Energy's been party to since 1998. First, it merged with United Meridian Corp. in March 1998, creating the ninth largest independent producer based on total market capitalization. Then in early 1999, it hooked up with independent producer Seagull Energy --- a move that weighted the company more toward natural gas than crude oil in terms of reserves and production.

Although she has no first-hand information on whether such a deal is in the offing, Sanders' Haas believes the success of a Noble-Ocean Energy marriage will depend on how much Noble is willing to pay for Ocean Energy. If Noble would overpay, it would be dilutive to earnings, she cautioned.

What would be a fair price? "Anything not exceeding 0.5 share of Noble [which is trading at roughly $40] for each share of Ocean Energy," Haas said. "It could work under the right exchange ratio."

If Noble Affiliates should acquire Ocean Energy, it would result in a company with a market capitalization of slightly more than $5 billion. The combined company "would be comparable in size to Apache [Corp.]," Haas noted. A combined Noble-Ocean Energy company would be roughly 60% natural gas production, would have a "decent" balance sheet, and would have a "lean" cost structure.

Noble Affiliates is engaged in the exploration, production and marketing of oil and gas in the U.S., Canada and Africa. It just reported first-quarter net income of $26.8 million, or 48 cents a share, on revenues of $271.7 million. This compares to a net loss of $8.9 million, or 16 cents a share, on revenues of $177.9 million for the same period in 1999.

Financial analysts expect good things for Noble Affiliates this year and next profit-wise. They project per-share earnings of $1.48 in 2000 and $1.58 in 2001. This would represent an increase of 71.5% over 1999's earnings of 86 cents per share, and a further boost of 6.8% in 2001.

Ocean Energy also reported better results for the first quarter. It had income of $43 million, or 25 cents per fully diluted share, on revenues of $246 million. This compares to a net loss of $81 million on revenues of $106 million for the first quarter of 1999. Last year's first-quarter results were impacted by one-time charges related to the company's merger with Seagull Energy and the sale of its Canadian subsidiary.

In the U.S., Ocean Energy's E&P activities are focused on the shelf and deepwater areas of the Gulf of Mexico, the Permian Basin, Mid-continent and Rocky Mountain regions. Like Noble, it also has operations in West Africa and a number of other foreign countries.

Susan Parker

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