Kerr-McGee Scores With Rockies Producer HS Resources
Rocky Mountains natural gas producer HS Resources Inc. agreed to a friendly merger with Kerr-McGee Corp. last week, in a deal that sent the San Francisco-based independent's stock soaring almost 21%. The deal, which would boost Kerr-McGee's gas reserves 77%, is a cash-and-stock merger worth about $1.25 billion, with Kerr-McGee also assuming $450 million of the independent's debt.
When completed, Kerr-McGee would become one of the top five U.S. independents. The announcement is the second in two weeks in which a larger U.S. producer has gobbled up a gas-rich Rockies independent. Earlier this month, Williams agreed to acquire Barrett Resources Inc. in a deal worth about $2.5 billion (see NGI, May 14), underscoring the importance many companies are putting on U.S. natural gas reserves. Similar mergers, say analysts, are expected in the coming months, and many will focus on companies with Rockies' assets, say analysts.
HS Resources holds about 1.3 Tcfe in reserves in the Denver-Julesburg Basin of northeast Colorado, near one of the most touted natural gas basins in the United States. With the acquisition, Kerr-McGee said it expected to increase its daily production of U.S. natural gas by more than 45%.
"These properties also offer the potential to add more than 500 Bcf from probable reserves through identified projects that have a proven track record of success," said Luke R. Corbett, Kerr-McGee CEO.
In the first quarter of this year, Kerr-McGee sold 202,000 b/d of oil worldwide. Its natural gas sales totaled 512 MMcf/d. However, its first quarter natural gas production dropped 4%. Along with its U.S. assets, the company operates in the North Sea, Ecuador, Kazakstan, China and Indonesia.
Both companies' boards approved the deal on Sunday. Oklahoma City-based Kerr-McGee will pay $55 for each share of HS Resources' common stock, which is a 24% premium to its closing price of $53.28 on Friday. HS Resources' stock closed up $11.12 on Monday, standing at $64.40, its highest price ever. Kerr-McGee would pay 70% cash and 30% in common stock, which would be issued at a fixed exchange ratio of 0.9494 a share for every share of HS Resources' stock.
The transaction could close in the third quarter, if HS Resources' stockholders and regulators approve the deal. When completed, one of HS Resources' co-founders is expected to join the Kerr-McGee board. The acquisition is expected to be immediately accretive to Kerr-McGee's earnings.
"We have not entered into this transaction lightly," said HS Resources CEO Nicholas J. Sutton. "This is the culmination of a process initiated by our board of directors to determine the best possible course of action in light of present industry conditions. This thorough process led to the Kerr-McGee transaction. As a small cap E&P company, our stock price is not accorded valuation multiples commensurate with the value of our work, assets and production."
The merger agreement allows for a $40 million fee by HS Resources to Kerr-McGee, along with reimbursement of expenses up to an additional $8 million, if the deal is terminated under certain conditions.
Acquisitive-minded Kerr-McGee also joined with Hydro-Quebec, Canada's largest electric company, on Monday to optimize and market a solid-state lithium metal polymer power cell in a 50-50 joint venture to be called Avestor Corp. The joint venture will commercialize a next-generation power cell.
"This venture reflects our belief that limitations in electrical generating and transmission capacity in North America, coupled with overall higher energy prices, will spur the development of advanced technologies for transportation and distributed generation and storage," said Corbett.
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