Anadarko Petroleum Corp., one of the producing industry’s heavyhitters, added more pop to its bat on Opening Day yesterday withthe announced purchase of independent producer Union PacificResources (UPR). Anadarko said the purchase will vault the companyinto the top six companies in terms of both North Americanproduction and reserves.
Under the agreement, which was unanimously approved by eachcompany’s board of directors, UPR shareholders will receive 0.455Anadarko common shares for each UPR common share they own. Thestock swap is valued at $4.4 billion. Closing is expected in July.
UPR will become a wholly-owned subsidiary of Houston-basedAnadarko. The new producing giant will hold significant acreagepositions and drilling opportunity in most of the high-potential,gas-rich basins of North America, including Western Canada, and theU.S. basins of the Rocky Mountains, the Midcontinent, Texas, andthe Gulf of Mexico. These basins today account for 90% of U.S. gassupply, Anadarko said. At current expected production rates, thereserve life index of the combined companies would be 10.8 years.
The purchase more than doubles Anadarko’s North American gasreserves from 2.5 Tcf to 5.8 Tcf. The increase moves the companyfrom the 13th largest company in terms of North American gasreserves to fifth. The increase of production is even morepronounced, as Anadarko will go from 170 Bcf/year (20th place) byitself to 634 Bcf/year (sixth place).
“Given the current outlook for energy markets, now is the timeto step up the pace of drilling for new energy reserves —particularly North American natural gas. More energy for America isgood news for our shareholders and it’s good news for consumers aswell,” said Bob Allison, CEO of Anadarko.
The North American opportunities were the linchpin of the deal,said Irene Haas, a consultant at Sanders Morris & Mundy. “[Thenew Anadarko’s] North American gas production will produce asignificant amount of cash flow in the very near future. There issufficient overlap in the properties involved so it won’t be toomuch of a stretch to fold them all in. The deal also gives Anadarkoan entrance into Canada, which is a big plus.”
Looking forward, an Anadarko spokesman said 70% of the combinedcompany’s production will come from onshore U.S., 16% from Canadaand 14% from offshore Gulf of Mexico. It will rely on its growthportfolio and strategy to be an exploration, development andexploitation leader. The company has already identified 100exploration projects with more than 11 billion barrels of netunrisked reserve potential. It has also identified 50 currentprojects that could be made more profitable.
Haas said the deal is not a harbinger of another round ofconsolidation in the producing industry. “Just because of thismove, I don’t think the other companies equal to Anadarko’s sizewill feel pressured to make a move. Devon bought Pennzoil. Apachedid a deal with Shell. Burlington merged with Poco. Many of theplayers have already done their big move. It’s a thinner field withstronger players. Anadarko is one of these strong players andimproved its position [yesterday].”
Anadarko shareholders will hold approximately 53% of thecombined company and UPR shareholders approximately 47%. Based onthe Anadarko closing price of $38.69 on March 31, the combinedcompany will have about 243 million shares outstanding and a marketcapitalization over $9 billion. The transaction has an impliedvalue to UPR shareholders of $17.60/share, representing a 21%premium to UPR’s closing price on March 31.
Anadarko said it believes the proposed merger will beimmediately accretive to both cash flow and earnings. Anadarkoestimates that if the companies were combined for the year 2000,cash flow would have been about $1.8 billion (or about$7.50/share). For the year 2001, given the current outlook forcommodity prices, cash flow is expected to increase further, tomore than $2 billion (or about $9.00/share). These numbers are asignificant increase from the stand- alone Anadarko cash flow of$317 million in 1999 and an expected $600 million in 2000.
The purchase will significantly expand Anadarko’s balance sheet.The combined companies would have had a total capitalization of $10billion, comprised of $5.9 billion of equity and $4.1 billion ofdebt, on a pro-forma consolidated basis as of year-end 1999.
Yet, while the balance sheet is growing, employmentopportunities are dwindling. “We do expect some modest costreductions with the merger, but that’s not what drives this deal.It’s about complementary skills and assets that can give usdramatic growth and profitability,” Allison said.
Fort Worth, TX-based Union Pacific posted income from continuingoperations of $89.2 million, or 36 cents/share last year. It hadbeen involved in a large push to drive down debt by sellingnon-core assets. The company, which has been rated among the topdrilling companies in the U.S. for the past several years, hadexperienced tough times lately as its stock price has fallen fromits 52-week high of $19.38 to less than $9 in late February.
“The merger provides significant benefits to UPR shareholders.It recognizes the value of our core producing assets and ourportfolio of projects throughout the Americas. We bring to the newAnadarko skills and experience that are complementary to theirexploration strength,” said George Lindahl III, CEO of UPR.
The stock-for-stock deal is subject to approval by both UPR andAnadarko shareholders as well as customary regulatory approval. Theagreement includes a provision under which UPR and Anadarko grantedeach other the right to purchase 19.9% of each other’s outstandingshares.
Allison will continue to be CEO of Anadarko. Lindahl will becomevice chairman of Anadarko after the merger. Five members of UPR’sboard of directors will join the Anadarko board, subject toAnadarko shareholder approval of the larger board.
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