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Devon Buys Santa Fe Snyder for $2.23 Billion

Devon Buys Santa Fe Snyder for $2.23 Billion

Devon Energy once again showed its knack for market timing on Friday by grabbing Santa Fe Snyder while its stock was undervalued. Devon performed a similar feat with PennzEnergy just last year (see NGI, May 24, 1999). Observers believe this $2.23 billion merger, excluding about $1 billion in debt assumption, could be one of the last this year among large and small producers because of the impact of the booming energy market on stock prices.

The merger of Santa Fe Snyder and Devon will create a top-five U.S.-based independent oil and gas producer with an enterprise value of $9 billion and reserves of about 1.1 billion barrels of oil equivalent (76% located in the U.S., 58% natural gas).

"Our two companies are stronger and better positioned to compete together than either would be independently," said Devon CEO J. Larry Nichols. "Both our companies have been active with the drill bit, and both have been active acquirers/consolidators. Our larger platform should enhance both strategies."

Terms of the deal call for Santa Fe Snyder shareholders to receive 0.22 shares of Devon stock for each of their Santa Fe Snyder shares. The non-taxable pooling-of-interests transaction will result in Santa Fe Snyder shareholders owning 32% and Devon shareholders owning 68% of the combined company. The new company will have $1.7 billion in long-term debt and liabilities valued at $400 million.

Santa Fe Snyder stock jumped nearly 7% ($0.75/share) Friday to $11.75, while Devon's shares fell sharply to $55.62, losing about 5% of their value. Nevertheless, Sanders Morris Harris energy analyst Irene Haas lauded Devon for getting a company with excellent assets at a great price.

"Snyder has done a lot of good things," said Haas. "However, they just haven't been able to get the market to give them credit. Lately it's been even more exasperating. If you look at even yesterday's close, it was trading a 3.7 times cash flow versus an industry average of about 5.7, so they've been lagging despite a really good underlying set of assets. I think management was under a lot of pressure to recognize the share's value. I think that's what motivated this." Haas attributed Santa Fe Snyder's stock price problems to its exposure in political hot spots overseas, and to slow start-up of its deep-water Gulf and West Africa projects. "There are always some glitches, however minor, that get blown all out of proportion.

"One thing I like about this is the superb timing because Santa Fe Snyder is sitting in such a low valuation while oil prices are at $30 and gas is at $4," Haas added. "In my view, this sort of arbitrage opportunity doesn't come around often. Somebody in the market usually will come in and close the gaps. That's exactly the kind of exercise we see Devon doing. They've always been very good with timing. They can move fast. They have a balance sheet. Before you know it, it's over."

Despite the near-term negative impact on Devon's stock, the transaction could produce significant long-term positive results for the companies, including annual savings of $30-$35 million and large areas of property overlap. Both companies have significant operations in the Permian Basin of West Texas, the Rocky Mountain region and the Gulf of Mexico.

With Santa Fe Snyder, Devon remains predominately North American but also will have significant international upside potential with reserves in Azerbaijan, Southeast Asia and South America. For the full year, on a pro forma basis, the company expects to produce between 115 and 125 million boe.

Devon Growth on Fast Track

Devon has climbed through the ranks of the top independents very rapidly over the past two years with its purchase of Northstar Energy Corp. in 1998 and its merger with PennzEnergy last year. The Northstar deal put it in among top-15 largest independents in terms of market capitalization with $1.9 billion, the PennzEnergy deal put it in the top 10 and this transaction with Santa Fe Snyder puts it in the top five.

Meanwhile, Santa Fe Snyder has been on equal aggressive growth track, adding a $210 million stake in four Shell Exploration & Production Co. deep-water Gulf of Mexico (GOM) assets last July only two months after the company was formed by the merger of Santa Fe Energy Resources and Snyder Oil Corp.

Although observers have expected current soaring oil and gas prices to begin to curb the "urge to merge" in the E&P sector, this Devon-Santa Fe Snyder merger follows a recent string of transactions that includes Anadarko's $5.6 billion purchase of Union Pacific Resources in April, Burlington Resources $2.5 billion purchase of Poco Petroleums in August of last year and talk just last week of a potential merger of Ocean Energy and Noble Affiliates (see NGI, May 15).

Haas, however, thinks this transaction probably will be one of the few remaining mergers this year among the large- and medium-sized independents "because from this point on I would expect even the laggards will go up and you won't have that room to move. You certainly won't be able to pick up something really cheap."

Completion of the merger is expected in the third quarter of 2000. The boards of both companies have approved the deal.

Devon CEO J. Larry Nichols will be president and CEO of the new company. Santa Fe Snyder CEO James L. Payne will be vice chairman, and Santa Fe Snyder Chairman James L. Pate will serve as chairman of the combined company. Devon's executive staff will continue in their current capacities. Santa Fe Snyder also will contribute executive staff to augment the strength of the management team. The size of the combined board of directors has not yet been determined. However, the restructured board will be composed of approximately two-thirds Devon members and one-third Santa Fe Snyder members.

In connection with the merger, Devon and Santa Fe Snyder have granted each other the right to purchase newly-issued shares representing 19.9% of each other's outstanding common shares. The companies also granted each other the right to receive a 3% termination fee, subject to certain conditions.

Rocco Canonica

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