Barrett Resources wasn’t quite ready to circle the wagons onFriday to fight off a hostile takeover bid by Royal Dutch ShellGroup, but did give Shell the cold shoulder. Barrett said it wouldbegin an open bidding process to consider proposals from “a numberof qualified parties, rather than commencing negotiations solelywith Shell under artificial deadlines that only serve Shell’sinterests.”

Shell last week launched the bid in an effort to increase itsnatural gas presence and gain a foothold in the second largestnatural gas basin of North American. Shell offered $2.2 billion incash and assumed debt but showed a willingness to shift to ahostile takeover if needed.

When the offer was formally announced on Wednesday, ShellExploration and Production Co. CEO Walter van de Vijver said thathe was “hopeful that the Barrett board will respond favorably” tothe offer to pay Barrett $55 a share, or $1.8 billion. Shell alsowould assume Barrett’s $400 million debt. The offer was 24% morethan the independent’s stock price of $44.25 on Feb. 28. However,following Shell’s formal offer, Barrett’s stock skyrocketed nearly34% finally closing Wednesday at $61.11. It had closed on Tuesdayat $45.62.

If Barrett rejects Shell’s offer, van de Vijver said, “Shellintends to commence a fully funded, all cash tender offer for alloutstanding Barrett shares.” He said the company would wait for anaffirmative answer only through Friday.

Thursday evening, Barrett made it clear that it would considerits strategic alternatives at its own pace and under its own terms.

“We are inviting Shell to participate in this process,” saidBarrett CEO Peter A. Dea. “If Shell attempts to bypass this orderlyprocess designed to maximize shareholder value, the board willconsider that action in due course. In the meantime, the boardurges shareholders to take no action with respect to their holdingsof the company.”

Barrett noted that Shell’s proposal was based on publiclyavailable information without the benefit of any due diligence withthe company. Barrett believes that, in properly valuing thecompany, Shell and other potential parties would find it highlyimportant to consider confidential, nonpublic information regardingthe company’s focused natural gas potential in the Rocky Mountainregion. Barrett said its management and advisors would assemblematerials to be shared with qualified parties. Participants will begiven access to a data room and provided with other detailed duediligence information. Final proposals will be requested by Barrettafter the participants have had an opportunity to conduct their duediligence. Barrett reiterated that it reserves the right to modifythe process at any time.

The acquisition would give Shell an “immediate material presencein the Rocky Mountain region,” said van de Vijver. Barrett’s gasand oil properties are primarily in the Rocky Mountain regions ofColorado, Wyoming and Utah, the mid-continent region of Kansas,Oklahoma, New Mexico and Texas, and the Gulf of Mexico regionoffshore Texas and Louisiana.

Shell is more than 100 times larger than Barrett in marketvalue, but analysts said Shell probably would go higher if itsfirst offer is rejected. Barrett apparently was approached by Shellinformally two weeks ago. Van de Vijver said he had spoken toBarrett CEO Peter Dea three times and said the discussions had been”friendly.” Barrett did not confirm the discussions.

Barrett could use Delaware laws, where it is incorporated, as apoison pill defense. Like other U.S. companies, the company’sstatutes enable it to issue a huge amount of shares if a hostilebidder makes a tender offer. However, Shell said it would useDelaware laws to protect itself and mount its bid because under thestate’s laws a process called “action by written consent” isallowed where a bidder gaining a majority of shares may takemanagement control of its target. The action would thus bypass thepoison pill.

In its year-end report two weeks ago, Barrett said its 2000 netincome had more than tripled to $68.1 million from $20 million in2000. Earnings per share were $2.04, and average daily gas outputwas 307 MMcf. Natural gas accounted for 96% of its production lastyear on an energy equivalent basis with the rest in crude oil.

Dea said Barrett’s 2000 growth was “strengthened by commodityprices,” and credited the operations team with a “commendable yearwith double digit gas production growth by drilling 1,227 wellswhile maintaining a favorable cost structure.” He said Barrett’slong-term growth was strengthened significantly, pointing to thenew core development area in the Raton Basin.

Last year Barrett added to its net drilling inventory in thePiceance Basin with 20-acre spacing approval and a nicheacquisition; increased its net leasehold in the Powder River Basincoalbed methane play to 468,000 net acres; and generated severalhigh potential exploration projects. The Piceance, Powder River andWind River basin properties accounted for 32%, 21% and 18% of totalproduction, respectively last year. It also achieved a 21% increasein reserves with year-end proved reserves at 1,372 Bcfe, with 1,323Bcf and 8.1 MMbbl. It added 356 Bcfe of proved reserves in 2000,replacing 302% of 2000 production of 118 Bcfe.

“The Rocky Mountain region, the focus of the company’s gasexploration and development activity, represents 88% of thecompany’s proved reserves, an increase from 81% reported in 1999,”it said in its year-end statement. “Barrett’s portfolio of highquality development, exploitation and exploration projects willcontinue our long-term growth.”

Moody’s Investors Service’s Robert N. McCreary and Andrew Oramplaced Barrett’s debt, Ba 1 rated $150 million of 7.55% seniorunsecured notes, under review for a possible upgrade because ofShell’s offer. Moody’s said its review is not triggered by thereview of Barrett’s 2000 results and outlook.

“It is a vote of confidence in North American natural gas pricefundamentals, Rocky Mountain natural gas price and prospectivityfundamentals generally, and prospectivity of Barrett’s reserve andprospect base in particular,” they said of the offer. “Barrett’sgrowth prospects increasingly center on very promising butcomparatively more price and unit cost sensitive major coalbedmethane properties in the Powder River Basin, in particular, and inthe Raton Basin.”

Carolyn Davis, Houston

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