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Norway's Norsk Hydro Casts Large Net in U.S. Gulf, Snags Spinnaker for $2.56B

September 26, 2005
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Shares of Spinnaker Exploration Co. soared more than 30% last Monday after the company said it agreed to a $2.56 billion buyout by Oslo, Norway-based Norsk Hydro, which covets Spinnaker's Gulf of Mexico assets, deepwater prospects and 3-D seismic data.

Under the terms of the proposed merger agreement, Spinnaker shareholders would receive $65.50/share in cash, a 34% premium to where Spinnaker shares closed on Friday ($48.75).

"This transaction allows Spinnaker Exploration shareholders to realize substantial and immediate value at an attractive premium and gives Spinnaker Exploration employees the opportunity to join a new, successful team," said Spinnaker CEO Roger Jarvis. "Hydro has complementary technical capabilities, a proven track record as a high-quality operator of assets, greater resources and a management that is eager to preserve Spinnaker's entrepreneurial spirit."

Spinnaker has about 373 Bcfe of proved reserves mainly in the Gulf of Mexico and more than 22,800 blocks of mostly contiguous Gulf 3-D seismic data. Its current production (prior to shut ins from Hurricane Katrina and Tropical Storm Rita) totals about 145 MMcfe/d. Spinnaker's net income for the first half of the year totaled $34.5 million (99 cents/share) compared to $31.3 million (90 cents) in the first half of last year.

The purchase has been approved by each company's board of directors but is subject to approval by Spinnaker's shareholders and certain regulatory agencies in the U.S. The transaction is expected to be completed in the fourth quarter.

The acquisition will substantially boost Norsk Hydro's presence and growth potential in the Gulf of Mexico. The Norwegian oil and gas producer said the transaction should be accretive to its earnings and cash flow. Norsk Hydro is paying US$2.45 billion in cash and will assume $110 million in debt.

"The acquisition is an important breakthrough in Hydro's international growth strategy," said Norsk Hydro CEO Eivind Reiten. "The transaction will unlock new growth and value-creation opportunities for our shareholders. We believe that the deepwater potential in the Gulf of Mexico is considerable. Hydro's industry-leading expertise in deepwater exploration and production, combined with Spinnaker's unique skills and acreage position in the region, will enable us to develop these prospects profitably in a stable and attractive fiscal environment."

Spinnaker has about 80 employees in Houston. The company has drilled 176 wells in the region with a 60% success rate and has an extensive seismic database covering both deepwater and deep-shelf prospects. It also has exploration positions in Nigeria.

Norsk Hydro said Spinnaker's total production is expected to reach about 50,000 boe/d by 2008 compared to current production of about 23,000 boe/d. Spinnaker's key deepwater Gulf assets include the following: the Front Runner spar, where a third well began production in the second quarter; the Spiderman, San Jacinto and Q projects under development in the Eastern Gulf; and the Thunder Hawk oil discovery. Spinnaker also produces gas and oil from 38 blocks on the Shelf.

Norsk Hydro is involved in the Telemark and Lorien discoveries in the Gulf and the Spinnaker's assets make it a much more significant player in the Gulf going forward. Norsk Hydro is a major international oil and gas company with current production totaling 575,000 boe/d. It's a Fortune 500 company with 35,000 employees in nearly 40 countries. It also is the world's third-largest aluminum producer.

Norsk Hydro said it expects to fund the acquisition with cash on hand. And it plans to hedge near-term oil and gas production from Spinnaker to secure short-term cash flow from producing assets.

Moody's Investors Service affirmed the A1 senior unsecured long-term rating of Norsk Hydro following the announcement. Its rating outlook on the company remains stable.

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