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Cal Dive Pays Premium to Acquire Remington's Offshore Reserves

Subsea contractor Cal Dive International Inc. last week said it will buy Remington Oil and Gas Corp., long considered a takeover target, in a deal valued at about $1.4 billion. Cal Dive, based in Houston, is paying the Dallas-based independent a premium of more than 22% to build its presence in the Gulf of Mexico and to retain key employees.

Analyst Robert Aronen wrote Cal Dive will pay more than $28/boe for Remington's proved reserves, "a hefty price, indeed, compared with the average multiple of $9.46/boe for the Vintage Petroleum and Unocal acquisitions." Vintage is being purchased by Occidental Petroleum; Unocal is being scooped up by Chevron Corp. "This premium price for Remington is similar to Norsk Hydro's purchase of Spinnaker Exploration last summer for nearly $42/boe of proven reserves," said Aronen. "In both cases, the purchase price isn't based solely on the proven reserves in the ground; rather, the price incorporates the value of each target company's unproven reserves and the vast potential of the deepwater Gulf of Mexico oil fields, where both Spinnaker and Remington have demonstrated success."

As of the end of 2005, Remington had about 280 Bcfe of proved reserves (unaudited) and identified prospects with risked reserves of more than 1,100 Bcfe, according to Cal Dive. Last October, Forbes ranked Remington No. 4 on list of the "200 Best Small Companies" -- the only producer to make it into the Top 10. Most of Remington's prospects are on the Outer Continental Shelf, with some deepwater prospects. Its present mix is 63% natural gas, 37% oil. In 2006, Remington estimated production will total 45-49 Bcfe. In December, Cal Dive forecast its 2006 output to be nearly identical: 44-47 Bcfe. All of Cal Dive's production is in the Gulf; Remington also holds assets along the Gulf Coast.

Under the terms of the agreement, Remington stockholders will receive $27 in cash and 0.436 shares of Cal Dive common stock for each Remington share they own, representing a transaction value of about $46.33/share based on Friday's closing price of Cal Dive shares. Only Remington shareholders have to approve the merger, and approvals are expected by the end of the second quarter. At closing, the total net cost to Cal Dive will be reduced by $2/share of cash Remington is expected to have on its balance sheet at that time.

"The deals are hard going, and it's hard to get deals at the right price," Cal Dive CEO Owen Kratz said during a conference call to discuss the acquisition. He said the merger is "really a spur to our growth. This transaction accelerates our potential growth in the market by adding a portfolio."

When asked if Cal Dive made the deal defensively or offensively, to ensure its continuing presence in the Gulf of Mexico, Kratz said," It allows us to be a lot more prudent and not operate out of sheer desperation," and added, "We've learned the hard way that to maximize the value we have to control the process."

As important to the deal for Cal Dive is Remington's personnel. Remington has about 30 skilled and specialized personnel at its base office in Dallas, and Cal Dive plans to maintain the Texas office and hopes to retain all of the management and operations employees when the deal closes.

"It's important to understand the strategy of the deal," Kratz said. "We are not transitioning Cal Dive to become another E&P. We're not overreacting. We're responding to a high demand cycle. For over a decade and a half now, we've been adding services and that's always been our goal. We see the potential for growth in this area. We're adding to our service lines, and we'll have access to both deepwater prospects and the means to exploit them...this is based on reservoir value, not contract value."

Aronen called Cal Dive "rather unusual," noting it runs on a hybrid model of marine contracting and production, using its offshore-contracting services to increase production from existing facilities and then sharing in the revenue based on the price of oil and gas. "As you might guess, this model has been fantastic as of late; it has driven Cal Dive's shares up nearly 200% over the past two years."

In 1992 Cal Dive incorporated Energy Resource Technology Inc. (ERT) to offer the oil and gas industry the option of selling mature or "sunset" properties instead of having to manage separate phases of the abandonment and decommissioning process. In its first 10 years of operations, ERT acquired interests in 90 offshore leases from more than 20 producers, and at the same time, added the technical disciplines needed to acquire and develop other leases offshore.

Among other things, ERT is part of the Atwater Valley Producers Group, which has partnered with Enterprise Products Partners LP to expand gas processing capacity offshore through the Independence Hub and Independence Trail natural gas pipeline (see NGI, Jan. 16). The offshore projects will process and gather gas and condensate production from the Atwater Valley, DeSoto Canyon, Lloyd Ridge and Mississippi Canyon areas located in the eastern region of the deepwater Gulf. The facilities, now under construction, are expected to receive first production in 2007.

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