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
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
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
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
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.