Houston-based operators Contango Oil & Gas Co. and Crimson Exploration Inc. have agreed to merge in an all-stock transaction that would create a company with prospects in the Gulf of Mexico’s (GOM) shallow water, as well as unconventional acreage in the United States and Canada.
Pro forma for the merger, Contango’s production would continue to be natural gas-weighted, 31% weighted to oil and liquids, with output of 101 MMcfe/d net. The combined company’s total proved reserves would be estimated to be 312 Bcfe, which at the end of March would have been worth about $932.5 million.
“We all see a great opportunity to accelerate and optimize the development of Crimson’s significant resource potential in parallel with continuing Contango’s GOM exploration focus,” said Contango CEO Joseph Romano. “Contango will look to optimize capital allocation across the combined portfolio, and we currently expect to continue to drill two to four exploration prospects per year in the GOM, while operating two to four onshore rigs focused on unconventional resource development.”
Contango, which lost founder Kenneth Peak to brain cancer just a few weeks ago, has concentrated its operations in the GOM shallow waters since its formation in 1999 (see Daily GPI, June 12, 2000). The operator also is an investor with gas industry pioneer George Mitchell in Alta Resources Investments LLC, whose primary exploration is in the liquids-rich Kaybob Duvernay in Alberta (see Daily GPI, April 13. 2011). In addition, Contango is an investor in Exaro Energy III LLC, which develops natural gas reserves in Wyoming’s Jonah Field with Encana Corp. (see Daily GPI, April 10, 2012). Contango’s portfolio also has about 24,000 acres in the Tuscaloosa Marine Shale.
Junior producer Crimson owns about 95,000 net acres total, with 19,000 in the emerging Woodbine play in Madison and Grimes counties in Southeast Texas; 8,600 in the Eagle Ford Shale; 10,000 in the Denver-Julesburg Basin of Colorado; and 4,800 net acres in the Haynesville Shale, Bossier Sands and James Lime in East Texas.
Under the merger agreement Crimson would become a Contango subsidiary and its shareholders would own 20.3% of Contango. Crimson CEO Allan Keel is to become CEO and president of Contango, and the company’s workforce would be combine with Contango.
“The combination with Contango provides substantial offshore cash flow generation that can be used to accelerate our drilling program in our oil and natural gas liquids-rich acreage targeting the Woodbine, Buda, Eagle Ford, James Lime and Liberty County [TX] prospects,” said Keel. “Furthermore, the merger will allow Crimson to delever our balance sheet and increase our trading float.”
Under terms of the transaction, Crimson shareholders would receive 0.08288 shares of Contango stock for each of their Crimson shares. Based on Contango’s closing stock price on Monday, the transaction represents an implied price per share for Crimson of $3.19, a premium of about 8% to its Monday closing price. Aggregate consideration in the transaction is approximately $390 million, based on Contango issuing about 3.9 million shares of its common stock and assuming $244 million of Crimson’s long-term debt.
The merger requires shareholder approval. Kenneth Peak’s estate, the companies’ management teams, and affiliates of Oaktree Capital Management, which is Crimson’s largest shareholder, have voted to support the transaction, which is set to close by the end of September. Brad Juneau also agreed to support the merger and would continue to be a member of the board. Juneau generates GOM prospects for Contango and would continue to do so for the combined company through Juneau Exploration LP.
Romano would continue to serve as chairman of Contango, and he assumes the chair of the newly created investment committee of the combined company’s board. Crimson’s E. Joseph Grady was named CFO and senior vice president. Keel and Grady have signed employment agreements that are subject to the deal’s closing. Crimson’s senior management is expected to join Contango in positions similar to those they have held. The board is to consist of eight directors, five selected by Contango and three by Crimson.
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