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Stone Energy Poised as Formidable Gulf Player

Stone Energy Poised as Formidable Gulf Player

In a deal that creates a formidable independent in the Gulf of Mexico basin, Stone Energy Corp. will purchase Basin Exploration Inc. in a tax-free, stock-for-stock merger worth $410 million, including the assumption of $48 million in debt. Stone, which operates exclusively in the Gulf, will pick up Basin's sizable 3D seismic knowledge base in the Gulf and add proven Rocky Mountain assets.

Stone President D. Peter Canty said last week that the merger would add 22 producing properties and 47 unexplored primary term lease blocks to the Lafayette, LA-based company's current prospect inventory in the Gulf Coast basin. The transaction will increase Stone's proved reserves as of year-end 1999 by nearly 54% to 596.9 Bcfe, up from 38.4 Bcfe.

Stone's current daily production would increase by 50% to nearly 300 MMcfe/d from its current 200 MMcfe/d. Prospective undeveloped acreage would increase to nearly 267,000 acres from its current 74,000. Pro forma reserves of the combined company would be about 65% natural gas and 35% oil, with 87% of the reserves in the Gulf.

"We are confident that our combined cash flow, along with the enhanced inventory of high quality drilling opportunities this combination creates, will yield impressive growth," Canty said.

Calling the merger a "compelling opportunity," Canty said that the combination, to be headquartered in Lafayette and remain Stone Energy Corp., "creates a powerful company" with a total market capitalization of $1.5 billion ($1.4 billion in equity and $100 million in net debt), and a 23% pro forma total debt-to-book capitalization.

"We will have the capacity to do things better, with more proven reserves and more daily production," Canty said. "We will now be in a position to compete head to head" with other Gulf of Mexico producers.

Basin brings not only proven Gulf properties, but its inventory of 3-D seismic databases across the Gulf and reserves in the Powder River and Green River basins of Wyoming. Its properties are located primarily offshore Louisiana and Texas. For the six months ended June 1, Basin's total revenues rose to 42% to $47.4 million. Net income totaled $12.7 million, up from $3 million a year earlier, mostly because of increased oil and gas production values in new fields offshore.

As part of the merger agreement, each company will implement a hedging program to lock in the cash flow value associated with 25% to 30% of the combined production from total proved reserves over the next two years. In 2001, based on the current outlook for commodity prices and the hedge security, the combined company is expected to generate a growth rate in discretionary cash flow of more than 20%. Canty said the natural gas would be hedged at $3.50 Mcf, and the oil would be hedged at $25 a barrel.

During a conference call with analysts last week, Canty spent most of his time discussing the new company's expanded Gulf assets, and very little on Basin's Rocky Mountain assets. While the properties in the Rockies are "important," Canty stressed they are not the focus of the company's future growth.

"Our focus will remain in the Gulf of Mexico," he said. Basin's Rocky Mountain assets total about 13% of the combined company's reserves, but only 3% of the production. "I've seen several exciting opportunities in those assets, several meaningful assets." He did not disclose whether the Powder River and Green River basin properties would be sold, saying the properties have a "future" with the new company.

Basin CEO Michael Smith called the merger a "win-win" situation, and added he was excited about the combined strength of the merger. While adding to Stone's Gulf base, the merger also gives Basin the ability to "spread its production risk" over its significant exploration assets there, he said.

"Stone is the right fit for us in every way, from the location and the scope of their exploration projects, to their long-term strategic objectives, and a corporate culture with values that we share," Smith said.

Canty will become CEO of the combined company. Founder James H. Stone had already announced plans to retire at the end of the year, but will remain chairman. Smith, who owns 15% of Basin's stock, will become a board member following the merger.

The transaction, which is expected to close early next year, calls for Basin stockholders to receive 0.3974 shares of Stone for each Basin share. Stone shareholders would own 71% of the company; Basin shareholders would own the other 29%. Based on Stone's closing price of $54.16 on the New York Stock Exchange on Oct. 27, the offer equals $21.52 a share, representing a 10% premium over Basin's closing price that day of $18.56 on the NASDAQ. Canty said that all of Basin's employees would remain with the company.

Carolyn Davis, Houston

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