In a deal that creates a formidable independent in the Gulf ofMexico basin, Stone Energy Corp. will purchase Basin ExplorationInc. in a tax-free, stock-for-stock merger worth $410 million,including the assumption of $48 million in debt. Stone, whichoperates exclusively in the Gulf, will pick up Basin’s sizable 3Dseismic knowledge base in the Gulf and add proven Rocky Mountainassets.

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

Stone’s current daily production would increase by 50% to nearly300 MMcfe/d from its current 200 MMcfe/d. Prospective undevelopedacreage would increase to nearly 267,000 acres from its current74,000. Pro forma reserves of the combined company would be about65% natural gas and 35% oil, with 87% of the reserves in the Gulf.

“We are confident that our combined cash flow, along with theenhanced inventory of high quality drilling opportunities thiscombination creates, will yield impressive growth,” Canty said.

Calling the merger a “compelling opportunity,” Canty said thatthe combination, to be headquartered in Lafayette and remain StoneEnergy Corp., “creates a powerful company” with a total marketcapitalization of $1.5 billion ($1.4 billion in equity and $100million in net debt), and a 23% pro forma total debt-to-bookcapitalization.

“We will have the capacity to do things better, with more provenreserves and more daily production,” Canty said. “We will now be ina position to compete head to head” with other Gulf of Mexicoproducers.

Basin brings not only proven Gulf properties, but its inventoryof 3-D seismic databases across the Gulf and reserves in the PowderRiver and Green River basins of Wyoming. Its properties are locatedprimarily offshore Louisiana and Texas. For the six months endedJune 1, Basin’s total revenues rose to 42% to $47.4 million. Netincome totaled $12.7 million, up from $3 million a year earlier,mostly because of increased oil and gas production values in newfields offshore.

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

During a conference call with analysts last week, Canty spentmost of his time discussing the new company’s expanded Gulf assets,and very little on Basin’s Rocky Mountain assets. While theproperties in the Rockies are “important,” Canty stressed they arenot the focus of the company’s future growth.

“Our focus will remain in the Gulf of Mexico,” he said. Basin’sRocky Mountain assets total about 13% of the combined company’sreserves, but only 3% of the production. “I’ve seen severalexciting opportunities in those assets, several meaningful assets.”He did not disclose whether the Powder River and Green River basinproperties 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 theability to “spread its production risk” over its significantexploration assets there, he said.

“Stone is the right fit for us in every way, from the locationand the scope of their exploration projects, to their long-termstrategic objectives, and a corporate culture with values that weshare,” 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 foreach Basin share. Stone shareholders would own 71% of the company;Basin shareholders would own the other 29%. Based on Stone’sclosing price of $54.16 on the New York Stock Exchange on Oct. 27,the offer equals $21.52 a share, representing a 10% premium overBasin’s closing price that day of $18.56 on the NASDAQ. Canty saidthat all of Basin’s employees would remain with the company.

Carolyn Davis, Houston

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