SandRidge Energy Inc., which up to now has explored almost exclusively for natural gas, on Monday agreed to acquire oil-weighted producer Arena Resources Inc. in a deal worth $1.6 billion.

The Oklahoma City-based independent agreed to pay Arena shareholders $2.50 in cash and 4.77 shares of stock for each Arena share, which values Arena at $40/share -- a 17% premium to its Friday close of $34.26.

"This acquisition of Arena continues the strategic shift we initiated in 2009 to increase our oil production and reserves," said CEO Tom Ward. "This transaction will add low-risk drilling opportunities in the Central Basin Platform [CBP] where we have been drilling and acquiring since 2007." The CBP is part of the Permian Basin in West Texas where SandRidge has focused its exploration for years.

Ward, who helped to create natural gas powerhouse Chesapeake Energy Corp. with Aubrey McClendon, began looking for more oily assets last year.

Beginning in late 2008 as gas prices tumbled, Ward said, "we felt it would be a hard couple years for natural gas." But he noted that he never knows how the market will react. "We have tried to be clear on our strategy. We believe the market is more prepared for a move to oil today than ever before."

In September SandRidge attempted to acquire bankrupt producer Crusader Energy Group Inc., a bid that ultimately failed (see Daily GPI, Sept. 24, 2009). Three months later SandRidge paid $800 million to buy some oily assets in the Permian Basin of West Texas from Forest Oil Corp. (see Daily GPI, Dec. 1, 2009).

SandRidge is modeling the transaction "to be accretive to 2011 cash flow per share," said Ward. The company also would continue to develop its "exceptional gas assets in the West Texas Overthrust [WTO]," he said. SandRidge now is the largest producer in the WTO, which is estimated to hold more than 30 Tcf of resource potential.

The latest transaction "uniquely positions SandRidge as one of the largest producers of West Texas conventional oil and gas," said the CEO. "The oil opportunities will come primarily from drilling and development of shallow, low-risk reservoirs located on the CBP," which "has produced over 13 billion bbl of oil since the 1930s. The combined company will have over 200,000 net acres in the Permian Basin and 5,700 identified locations to drill primarily in the shallow San Andres and the Clear Fork formations."

SandRidge and Arena began discussing a merger in January, executives said. Ward would remain CEO. Arena's management and board of directors would have no role in the company once the merger is completed. The merger is expected to be completed before the end of the year and is contingent upon approval by stockholders of both companies.

"We have ultimate confidence that Tom Ward and his team are well equipped to deliver enhanced value of Arena's assets to stockholders," said Arena Chairman Tim Rochford.

The revamped SandRidge would transform the company "from a natural gas company to a more balanced portfolio," said Ward. "The economics of natural gas just aren't as good today as they were a few years ago."

SandRidge is not the only U.S. gas producer to make the shift to a more oily portfolio. Among the bigger names to grab more oil assets are EOG Resources Inc., which is working on "combo" oil and gas plays in some of its properties, including the Barnett Shale. Chesapeake also is buying up more liquids-based production assets.

"The economics just compel you to look for oil rather than natural gas right now," McClendon said at the recent Hart Energy's Developing Unconventional Gas (DUG) conference in Fort Worth, TX. "If you are in this industry, you have to be very adaptable." Chesapeake has expanded its exploration into the liquids-rich Granite Wash Basin of West Texas -- and it's picked up oily assets in the Powder River Basin.

Although McClendon had eschewed exploring in the Rocky Mountains, he's since changed his tune. Chesapeake and an undisclosed partner recently leased about 700,000 acres in the Powder River Basin of Wyoming to look for oil, he told attendees at the DUG conference. He did not divulge how much he paid for the newly acquired assets nor their location. However, McClendon said oil eventually could account for half of the company's revenues.

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