Shareholders Blast PennzEnergy for Selling too Cheap
While analysts consider Devon Energy Corp.'s planned acquisition of
PennzEnergy Co. a smart move, PennzEnergy investors are smarting over what
they consider too low a price.
Houston-based PennzEnergy and Devon of Oklahoma City, OK, announced
the transaction last week. The deal would form a new Devon Energy Corp.
PennzEnergy shareholders would receive 0.4475 shares of common stock of
the new company for each PennzEnergy common share. Each share of Devon
would be converted to one share of new Devon. PennzEnergy shareholders
would own about 31% of the combined company, and Devon shareholders would
own about 69%.
PennzEnergy, the exploration and production arm of Pennzoil, was spun
off in December when Pennzoil Products Group merged with Quaker State.
Previously (in 1997) Pennzoil was sought by Union Pacific Resources (UPR),
which offered $84 a share for the company. Management rejected the offer
and investors saw Pennzoil's share price drop about 60%. "I think
some of those shareholders still remember the UPR offer, and that was a
missed opportunity," said Sanders Morris Mundy analyst Irene Haas.
"However, just to put things into perspective, oil prices have gone
through a long period of contraction through '98. This is definitely a
In January J.P. Morgan analyst Jay Wilson called PennzEnergy an attractive
takeover target for a large independent producer or integrated energy company
because the company's stock was significantly undervalued. But at the time
PennzEnergy's management said the company was not for sale (see
NGI Jan. 11, 1999).
Analysts participating in a Thursday conference call with managements
of both companies had enthusiastic cheers for Devon, but a couple had sharp
words for the deal and PennzEnergy Chairman James L. Pate. "You made
it clear that you not only were not willing to shop the company but that
you did everything to avoid doing that," one analyst told Pate during
the call. "And other than your [continued] current employment, I don't
feel we gain as PennzEnergy shareholders. I will tell you that we definitely
will be voting against the deal.
"What Mr. Pate has done here has been a pattern for a couple of
years. abrogating his obligations to shareholders here is clear. And we
will be voting against this transaction. I think that everyone looking
at this should not be assuming this combination is going to go through
because what was done here is wrong, and I'd ask Mr. Pate why you would
have so clearly avoided the potential to explore what alternatives would
be available in a sale before making this decision."
Pate countered that alternatives were explored, "but our alternatives
were not to sell the company. We looked at a number of merger opportunities,
strategic mergers, acquisitions and other opportunities to grow the company.
The company is not for sale, and this appeared to us to be a very, very
attractive opportunity to get a very solid asset base in North America,
to be a major player in the North American gas market, to de-leverage the
company and gain financial flexibility and to get a management with a demonstrated
track record of delivering shareholder value. [Devon's] valuation, of course,
is much higher than ours. Their cash flow multiple is much higher, and
part of this transaction anticipates that PennzEnergy is going to get an
uplift in its valuation as a result of all the things that I mentioned."
The analyst was not placated. "The rights of shareholders and shareholder
value has never been something that's important to you, and I don't say
Similar displeasure could be found on an Internet message board devoted
to PennzEnergy. "Pate is not to be trusted, but he sure is smart enough
to take care of himself. Chairman of the board of the combined company
is bound to make him a few bucks," wrote one poster. Another fretted
that the deal links the price of PennzEnergy shares to that of Devon shares.
"If [Devon's] stock drops back to its normal valuation, do not underestimate
the potential financial fiasco to [PennzEnergy] shareholders."
The deal would create an international oil and gas company with an equity
market capitalization of about $2.6 billion. Total enterprise value would
be about $4.7 billion. The company would rank in the top 10 of all U.S.-based
independent oil and gas producers in terms of market capitalization, total
proved reserves and annual production. The combined company would have
proved reserves of about 2.1 Tcf of gas and 318.5 million barrels of oil,
or 660 million Boe, and would have core operations onshore U.S., in the
Gulf of Mexico and in Canada and substantial international assets, highlighted
by interests in Azerbaijan. The merger is expected to be non-taxable to
shareholders. Boards of each company approved the merger, which is subject
to shareholder and Federal Trade Commission approval. The combined company
would be headquartered in Oklahoma City, with operating offices in Oklahoma
City, Houston, Denver and Calgary.
The deal's critics found suspicious the timing of a Kerr-McGee announcement
that it is reviewing its investment in Devon Energy. Kerr-McGee holds 9,954,000
shares, about 20%, of Devon common stock. Kerr-McGee executives Luke R.
Corbett, Tom J. McDaniel, and Lawrence H. Towell last week resigned from
the Devon board of directors. Kerr-McGee's shares in Devon are subject
to transfer limitations set forth in Devon's December 1996 standstill agreement
with Kerr-McGee, Devon said. In 1996, Kerr-McGee's North American onshore
assets were merged into Devon.
Devon and PennzEnergy executives said the Kerr-McGee executives were
excluded from merger negotiations and were finding out about the deal concurrent
with the investment community. A Kerr-McGee spokeswoman would not comment.
Combined, Devon and PennzEnergy expect to realize cost savings of $50-$60
million annually. Reductions are expected in operating, general and administrative,
interest and exploration expenses. J. Larry Nichols, Devon president and
CEO, will be president, CEO and a director of the combined company. Pate
will serve as chairman of the board. Devon's executive staff will remain.
PennzEnergy will contribute selected executive staff. Devon and PennzEnergy
will each appoint seven members to the combined board of directors. John
W. Nichols, Devon's current chairman and Larry Nichols' father, will serve
as chairman emeritus.
Although he participated in the conference call, no mention was made
during the call or in the press release of PennzEnergy CEO Stephen D. Chesebro'
and his future with the company. "I get the feeling that Cheesebro
(sic) is dead set against this merger," posited one investor posting
on the Internet. "I think Pate is the only one who thinks this is
such a great idea." A PennzEnergy spokeswoman reluctantly told NGI
that Chesebro' - who previously was CEO of Tenneco Energy before it was
spun off from Tenneco Inc. and bought by El Paso-will be leaving the company
to pursue other interests.
The combined Devon and PennzEnergy will benefit from Devon's strong
balance sheet, finding and development expertise and PennzEnergy's inventory
of development opportunities, analysts and company executives said. Highlights
of the combined company include a proved reserve base of about 660 MMBoe
(52% gas); U.S. proved reserves of 423 MMBoe; Canadian proved reserves
of 144 MMBoe; net daily production of 230,000 Boe (60% gas); and a large
inventory of exploration opportunities with an aggregate 15 million net
undeveloped acres of leasehold. Devon is a top coal-bed methane producer
with a strong presence in the Powder River Basin. PennzEnergy has large
coal-bed holdings in the Raton Basin.
"For [PennzEnergy, Devon] will bring a sound balance sheet, great
management and the much-needed capital to accelerate production growth.
[PennzEnergy] does not have the balance sheet to fund the drilling without
the merger," Sanders Morris Mundy's Haas said in a research note.
The merger is expected to be accounted for as a purchase, and the combined
company expects to take a charge to earnings of between $350 and $500 million
for accounting adjustments. Completion of the merger is expected in the
third quarter of 1999.
PennzEnergy shares closed down 12.5 cents Thursday following the announcement
at $14.50 in trading that was nearly nine times normal volume. Devon shares
closed up $2.25 at $33.75 in trading that was nearly five and a half times
Joe Fisher, Houston