Devon Energy once again showed its knack for market timing on Friday by grabbing Santa Fe Snyder while its stock was undervalued. Devon performed a similar feat with PennzEnergy just last year (see NGI, May 24, 1999). Observers believe this $2.23 billion merger, excluding about $1 billion in debt assumption, could be one of the last this year among large and small producers because of the impact of the booming energy market on stock prices.

The merger of Santa Fe Snyder and Devon will create a top-fiveU.S.-based independent oil and gas producer with an enterprisevalue of $9 billion and reserves of about 1.1 billion barrels ofoil equivalent (76% located in the U.S., 58% natural gas).

“Our two companies are stronger and better positioned to competetogether than either would be independently,” said Devon CEO J.Larry Nichols. “Both our companies have been active with the drillbit, and both have been active acquirers/consolidators. Our largerplatform should enhance both strategies.”

Terms of the deal call for Santa Fe Snyder shareholders toreceive 0.22 shares of Devon stock for each of their Santa FeSnyder shares. The non-taxable pooling-of-interests transactionwill result in Santa Fe Snyder shareholders owning 32% and Devonshareholders owning 68% of the combined company. The new companywill have $1.7 billion in long-term debt and liabilities valued at$400 million.

Santa Fe Snyder stock jumped nearly 7% ($0.75/share) Friday to$11.75, while Devon’s shares fell sharply to $55.62, losing about5% of their value. Nevertheless, Sanders Morris Harris energyanalyst Irene Haas lauded Devon for getting a company withexcellent assets at a great price.

“Snyder has done a lot of good things,” said Haas. “However,they just haven’t been able to get the market to give them credit.Lately it’s been even more exasperating. If you look at evenyesterday’s close, it was trading a 3.7 times cash flow versus anindustry average of about 5.7, so they’ve been lagging despite areally good underlying set of assets. I think management was undera lot of pressure to recognize the share’s value. I think that’swhat motivated this.” Haas attributed Santa Fe Snyder’s stock priceproblems to its exposure in political hot spots overseas, and toslow start-up of its deep-water Gulf and West Africa projects.”There are always some glitches, however minor, that get blown allout of proportion.

“One thing I like about this is the superb timing because SantaFe Snyder is sitting in such a low valuation while oil prices areat $30 and gas is at $4,” Haas added. “In my view, this sort ofarbitrage opportunity doesn’t come around often. Somebody in themarket usually will come in and close the gaps. That’s exactly thekind of exercise we see Devon doing. They’ve always been very goodwith timing. They can move fast. They have a balance sheet. Beforeyou know it, it’s over.”

Despite the near-term negative impact on Devon’s stock, thetransaction could produce significant long-term positive resultsfor the companies, including annual savings of $30-$35 million andlarge areas of property overlap. Both companies have significantoperations in the Permian Basin of West Texas, the Rocky Mountainregion and the Gulf of Mexico.

With Santa Fe Snyder, Devon remains predominately North Americanbut also will have significant international upside potential withreserves in Azerbaijan, Southeast Asia and South America. For thefull year, on a pro forma basis, the company expects to producebetween 115 and 125 million boe.

Devon Growth on Fast Track

Devon has climbed through the ranks of the top independents veryrapidly over the past two years with its purchase of NorthstarEnergy Corp. in 1998 and its merger with PennzEnergy last year. TheNorthstar deal put it in among top-15 largest independents in termsof market capitalization with $1.9 billion, the PennzEnergy dealput it in the top 10 and this transaction with Santa Fe Snyder putsit in the top five.

Meanwhile, Santa Fe Snyder has been on equal aggressive growthtrack, adding a $210 million stake in four Shell Exploration &Production Co. deep-water Gulf of Mexico (GOM) assets last Julyonly two months after the company was formed by the merger of SantaFe Energy Resources and Snyder Oil Corp.

Although observers have expected current soaring oil and gas prices to begin to curb the “urge to merge” in the E&P sector, this Devon-Santa Fe Snyder merger follows a recent string of transactions that includes Anadarko’s $5.6 billion purchase of Union Pacific Resources in April, Burlington Resources $2.5 billion purchase of Poco Petroleums in August of last year and talk just last week of a potential merger of Ocean Energy and Noble Affiliates (see NGI, May 15).

Haas, however, thinks this transaction probably will be one ofthe few remaining mergers this year among the large- andmedium-sized independents “because from this point on I wouldexpect even the laggards will go up and you won’t have that room tomove. You certainly won’t be able to pick up something reallycheap.”

Completion of the merger is expected in the third quarter of2000. The boards of both companies have approved the deal.

Devon CEO J. Larry Nichols will be president and CEO of the newcompany. Santa Fe Snyder CEO James L. Payne will be vice chairman,and Santa Fe Snyder Chairman James L. Pate will serve as chairmanof the combined company. Devon’s executive staff will continue intheir current capacities. Santa Fe Snyder also will contributeexecutive staff to augment the strength of the management team. Thesize of the combined board of directors has not yet beendetermined. However, the restructured board will be composed ofapproximately two-thirds Devon members and one-third Santa FeSnyder members.

In connection with the merger, Devon and Santa Fe Snyder havegranted each other the right to purchase newly-issued sharesrepresenting 19.9% of each other’s outstanding common shares. Thecompanies also granted each other the right to receive a 3%termination fee, subject to certain conditions.

Rocco Canonica

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