Stone Energy Poised as Formidable Gulf Player
In a deal that creates a formidable independent in the Gulf of
Mexico basin, Stone Energy Corp. will purchase Basin Exploration
Inc. in a tax-free, stock-for-stock merger worth $410 million,
including the assumption of $48 million in debt. Stone, which
operates exclusively in the Gulf, will pick up Basin's sizable 3D
seismic knowledge base in the Gulf and add proven Rocky Mountain
Stone President D. Peter Canty said last week that the merger
would add 22 producing properties and 47 unexplored primary term
lease blocks to the Lafayette, LA-based company's current prospect
inventory in the Gulf Coast basin. The transaction will increase
Stone's proved reserves as of year-end 1999 by nearly 54% to 596.9
Bcfe, up from 38.4 Bcfe.
Stone's current daily production would increase by 50% to nearly
300 MMcfe/d from its current 200 MMcfe/d. Prospective undeveloped
acreage would increase to nearly 267,000 acres from its current
74,000. Pro forma reserves of the combined company would be about
65% natural gas and 35% oil, with 87% of the reserves in the Gulf.
"We are confident that our combined cash flow, along with the
enhanced inventory of high quality drilling opportunities this
combination creates, will yield impressive growth," Canty said.
Calling the merger a "compelling opportunity," Canty said that
the combination, to be headquartered in Lafayette and remain Stone
Energy Corp., "creates a powerful company" with a total market
capitalization of $1.5 billion ($1.4 billion in equity and $100
million in net debt), and a 23% pro forma total debt-to-book
"We will have the capacity to do things better, with more proven
reserves and more daily production," Canty said. "We will now be in
a position to compete head to head" with other Gulf of Mexico
Basin brings not only proven Gulf properties, but its inventory
of 3-D seismic databases across the Gulf and reserves in the Powder
River and Green River basins of Wyoming. Its properties are located
primarily offshore Louisiana and Texas. For the six months ended
June 1, Basin's total revenues rose to 42% to $47.4 million. Net
income totaled $12.7 million, up from $3 million a year earlier,
mostly because of increased oil and gas production values in new
As part of the merger agreement, each company will implement a
hedging program to lock in the cash flow value associated with 25%
to 30% of the combined production from total proved reserves over
the next two years. In 2001, based on the current outlook for
commodity prices and the hedge security, the combined company is
expected to generate a growth rate in discretionary cash flow of
more than 20%. Canty said the natural gas would be hedged at $3.50
Mcf, and the oil would be hedged at $25 a barrel.
During a conference call with analysts last week, Canty spent
most of his time discussing the new company's expanded Gulf assets,
and very little on Basin's Rocky Mountain assets. While the
properties in the Rockies are "important," Canty stressed they are
not the focus of the company's future growth.
"Our focus will remain in the Gulf of Mexico," he said. Basin's
Rocky Mountain assets total about 13% of the combined company's
reserves, but only 3% of the production. "I've seen several
exciting opportunities in those assets, several meaningful assets."
He did not disclose whether the Powder River and Green River basin
properties would be sold, saying the properties have a "future"
with the new company.
Basin CEO Michael Smith called the merger a "win-win" situation,
and added he was excited about the combined strength of the merger.
While adding to Stone's Gulf base, the merger also gives Basin the
ability to "spread its production risk" over its significant
exploration assets there, he said.
"Stone is the right fit for us in every way, from the location
and the scope of their exploration projects, to their long-term
strategic objectives, and a corporate culture with values that we
share," Smith said.
Canty will become CEO of the combined company. Founder James H.
Stone had already announced plans to retire at the end of the year,
but will remain chairman. Smith, who owns 15% of Basin's stock,
will become a board member following the merger.
The transaction, which is expected to close early next year,
calls for Basin stockholders to receive 0.3974 shares of Stone for
each Basin share. Stone shareholders would own 71% of the company;
Basin shareholders would own the other 29%. Based on Stone's
closing price of $54.16 on the New York Stock Exchange on Oct. 27,
the offer equals $21.52 a share, representing a 10% premium over
Basin's closing price that day of $18.56 on the NASDAQ. Canty said
that all of Basin's employees would remain with the company.
Carolyn Davis, Houston