Occidental Petroleum Corp. late Thursday agreed to a merger with Vintage Petroleum Inc. in a transaction valued at $3.8 billion. The deal will give Oxy more than 3 billion boe of total proved reserves, or about 20% more than at year-end 2004, with Vintage contributing 437 million boe in proved reserves and 421 million boe of probable and possible reserves.
In 2Q2005, Vintage's total production averaged 76,000 boe/d, with Argentina contributing 37,000 boe/d and California adding 11,000 boe/d. At the end of 2004, Oxy's total proved reserves were 2.53 billion boe. The addition of Vintage's proved reserves is expected to extend its reserve life at current production levels from 12.2 years to 12.7 years.
Vintage's primary oil and gas assets are in Argentina and Bolivia (67% of 2004 total proved reserves), and about 32% of its assets are in the United States, with 16% in California. Under the agreement, Oxy said it will sell Vintage assets in East Texas, along the Gulf Coast and in the MidContinent region. The U.S. assets targeted for sale contributed 19,000 boe/d in the second quarter.
Oxy CEO Ray Irani said during a conference call Friday the company plans to double Vintage's production from Argentina within five years and increase production in California by up to 20% in the next few years.
Under terms of the merger, Oxy will pay $20 for each Vintage share in cash, plus 0.43 Occidental share per Vintage share. As part of this transaction, Oxy will repurchase nine million of its shares in the open market. During a conference call with analysts Friday, Irani said Vintage would begin contributing to earnings in 2006.
Oxy will incorporate Vintage's California assets into its nearby operations in the southern San Joaquin Valley and in the Sacramento Valley. It also plans to integrate Vintage's Latin American assets into its existing position in Latin America, where it is one of the largest producers in Colombia and Ecuador, with combined 2Q2005 net production of 70,000 bbl/d of oil. Vintage's 2Q production in Yemen averaged nearly 4,000 bbl/d.
Oxy expects to continue growing both reserves and production from the Vintage assets it retains through a capital program with estimated spending in the range of $150-200 million annually. With the two companies' synergies, corporate expenses are expected to be reduced by $40-60 million per year, and exploration capital expense will drop about $100 million per year.
The acquisition and the stock re-purchase program will be financed by $1.7 billion of cash on hand as of Sept. 30, 2005, plus additional cash generated in the fourth quarter. In addition, Vintage expects to have $225 million in cash at year-end 2005, and Oxy will be assuming $550 million of Vintage debt.
The transaction is expected to close in 1Q2006, subject to regulatory approvals.
Following the announcement, Moody's Investors Service on Friday affirmed Oxy's ratings and maintained the stable outlook. Moody's also placed the ratings of Vintage under review for possible upgrade.
"These rating actions reflect Oxy's increased scale and diversification, exploitation growth opportunities and cost-saving synergies, while not materially impacting leverage; offset by a higher cost structure and lower cash margins (principally in Argentina), resulting in a lower leveraged full-cycle ratio, and the integration risk of a corporate acquisition," Moody's analysts said. "Oxy's acquisition of Vintage provides increased scale, geographic diversification and exploitation opportunities for production growth. While Oxy typically has acquired assets, this corporate acquisition fits its strategy of focusing on several core areas."
Moody's noted Oxy is paying about $9/boe of proved reserves for Vintage, "which is considerably higher than its three-year all sources finding and development (F&D) costs of $5/boe. This price is consistent generally with prices being paid for acquisitions in the current high commodity price environment and is similar to what Oxy paid earlier this year in the Permian Basin; however, we note that this will increase Oxy's full-cycle costs."
Oxy's leverage and liquidity, said Moody's "have been among the strongest in the investment grade E&P peer group and we do not expect this transaction to have a material effect on the company's leverage."
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