Barrett Rebuffs Shell's $2.2 Billion Takeover Bid

Barrett Resources wasn't quite ready to circle the wagons on Friday to fight off a hostile takeover bid by Royal Dutch Shell Group, but did give Shell the cold shoulder. Barrett said it would begin an open bidding process to consider proposals from "a number of qualified parties, rather than commencing negotiations solely with Shell under artificial deadlines that only serve Shell's interests."

Shell last week launched the bid in an effort to increase its natural gas presence and gain a foothold in the second largest natural gas basin of North American. Shell offered $2.2 billion in cash and assumed debt but showed a willingness to shift to a hostile takeover if needed.

When the offer was formally announced on Wednesday, Shell Exploration and Production Co. CEO Walter van de Vijver said that he was "hopeful that the Barrett board will respond favorably" to the offer to pay Barrett $55 a share, or $1.8 billion. Shell also would assume Barrett's $400 million debt. The offer was 24% more than the independent's stock price of $44.25 on Feb. 28. However, following Shell's formal offer, Barrett's stock skyrocketed nearly 34% finally closing Wednesday at $61.11. It had closed on Tuesday at $45.62.

If Barrett rejects Shell's offer, van de Vijver said, "Shell intends to commence a fully funded, all cash tender offer for all outstanding Barrett shares." He said the company would wait for an affirmative answer only through Friday.

Thursday evening, Barrett made it clear that it would consider its strategic alternatives at its own pace and under its own terms.

"We are inviting Shell to participate in this process," said Barrett CEO Peter A. Dea. "If Shell attempts to bypass this orderly process designed to maximize shareholder value, the board will consider that action in due course. In the meantime, the board urges shareholders to take no action with respect to their holdings of the company."

Barrett noted that Shell's proposal was based on publicly available information without the benefit of any due diligence with the company. Barrett believes that, in properly valuing the company, Shell and other potential parties would find it highly important to consider confidential, nonpublic information regarding the company's focused natural gas potential in the Rocky Mountain region. Barrett said its management and advisors would assemble materials to be shared with qualified parties. Participants will be given access to a data room and provided with other detailed due diligence information. Final proposals will be requested by Barrett after the participants have had an opportunity to conduct their due diligence. Barrett reiterated that it reserves the right to modify the process at any time.

The acquisition would give Shell an "immediate material presence in the Rocky Mountain region," said van de Vijver. Barrett's gas and oil properties are primarily in the Rocky Mountain regions of Colorado, Wyoming and Utah, the mid-continent region of Kansas, Oklahoma, New Mexico and Texas, and the Gulf of Mexico region offshore Texas and Louisiana.

Shell is more than 100 times larger than Barrett in market value, but analysts said Shell probably would go higher if its first offer is rejected. Barrett apparently was approached by Shell informally two weeks ago. Van de Vijver said he had spoken to Barrett CEO Peter Dea three times and said the discussions had been "friendly." Barrett did not confirm the discussions.

Barrett could use Delaware laws, where it is incorporated, as a poison pill defense. Like other U.S. companies, the company's statutes enable it to issue a huge amount of shares if a hostile bidder makes a tender offer. However, Shell said it would use Delaware laws to protect itself and mount its bid because under the state's laws a process called "action by written consent" is allowed where a bidder gaining a majority of shares may take management control of its target. The action would thus bypass the poison pill.

In its year-end report two weeks ago, Barrett said its 2000 net income had more than tripled to $68.1 million from $20 million in 2000. Earnings per share were $2.04, and average daily gas output was 307 MMcf. Natural gas accounted for 96% of its production last year on an energy equivalent basis with the rest in crude oil.

Dea said Barrett's 2000 growth was "strengthened by commodity prices," and credited the operations team with a "commendable year with double digit gas production growth by drilling 1,227 wells while maintaining a favorable cost structure." He said Barrett's long-term growth was strengthened significantly, pointing to the new core development area in the Raton Basin.

Last year Barrett added to its net drilling inventory in the Piceance Basin with 20-acre spacing approval and a niche acquisition; increased its net leasehold in the Powder River Basin coalbed methane play to 468,000 net acres; and generated several high potential exploration projects. The Piceance, Powder River and Wind River basin properties accounted for 32%, 21% and 18% of total production, respectively last year. It also achieved a 21% increase in reserves with year-end proved reserves at 1,372 Bcfe, with 1,323 Bcf and 8.1 MMbbl. It added 356 Bcfe of proved reserves in 2000, replacing 302% of 2000 production of 118 Bcfe.

"The Rocky Mountain region, the focus of the company's gas exploration and development activity, represents 88% of the company's proved reserves, an increase from 81% reported in 1999," it said in its year-end statement. "Barrett's portfolio of high quality development, exploitation and exploration projects will continue our long-term growth."

Moody's Investors Service's Robert N. McCreary and Andrew Oram placed Barrett's debt, Ba 1 rated $150 million of 7.55% senior unsecured notes, under review for a possible upgrade because of Shell's offer. Moody's said its review is not triggered by the review of Barrett's 2000 results and outlook.

"It is a vote of confidence in North American natural gas price fundamentals, Rocky Mountain natural gas price and prospectivity fundamentals generally, and prospectivity of Barrett's reserve and prospect base in particular," they said of the offer. "Barrett's growth prospects increasingly center on very promising but comparatively more price and unit cost sensitive major coalbed methane properties in the Powder River Basin, in particular, and in the Raton Basin."

Carolyn Davis, Houston

©Copyright 2001 Intelligence Press, Inc. All rights reserved. The preceding news report may not be republished or redistributed in whole or in part without prior written consent of Intelligence Press, Inc.