Contrary to reports that Devon Energy Corp.’s plans to acquire Mitchell Energy & Development Corp. as well as Anderson Exploration Co. are falling apart as its stock falls, Devon CEO Larry Nichols assuaged investors on Wednesday during a conference call and reaffirmed his company’s commitment to completing both deals. When the deals are consummated — expected within the next three months — Oklahoma City-based Devon would become the largest independent in the United States.

Rumors have become more persistent following a stock tumble that has brought Devon down from a high of more than $50 at the beginning of August to close at just above $31 in the past week. It has taken one of the biggest hits to its stock since Sept. 11, when stocks across the board began to fall. When it agreed to purchase Mitchell in August, Devon’s stock stood at $50.26, which made the deal worth about $3.1 billion (see NGI, Aug. 20). When it agreed to purchase Calgary-based Anderson in early September in a deal worth about $4.6 billion, its stock price was $46.27 (see NGI, Sept. 10).

However, though its stock has fallen more than $10 in less than a month, Nichols said all three companies are committed to completing the deals before the end of the year. In New York to meet with bond holders about the acquisitions, Nichols spent about 30 minutes to rebut the “reports and considerable speculation about our stock and the two pending acquisitions.”

Said Nichols, “First and foremost, we remain fully 100% committed to both deals. We make all of our decisions based on the long-term view of the market, and that view has not changed since the deals were announced…and not on the other side(s).” He said it was “still early” to discuss how the financing package will be completed, but said Devon was “very pleased with the response to this offer.” The first phase of the syndication process has been completed, he said, and Devon has 10 bank commitments, which were “more than we were asking for.”

“The Sept. 11 tragedy did delay us somewhat, but we are on target with what we were planning to do, which is reassuring in light of recent events,” Nichols said. Referring to rumors that several financing entities were poised to back out of the deals, Nichols said, “I can assure you, there are very few.” He said the deals struck with both Mitchell and Anderson “specifically exclude changes in the general economy or stock market or effect on commodity prices…there is no force majeure clause…no clause on going to war…no chase on adverse changes in the market as a condition of funding.”

Regarding Anderson, Nichols, who was the only company official to speak, said he expects Devon to close on the deal within three weeks. The takeover circular was sent out on Sept. 6, he said, and the tender offer “must be open” until Oct. 12. Following that date, he said the deal will be completed. The acquisition has already been approved by the Federal Trade Commission, and Nichols said the “second and third” approvals, from Canadian officials, are expected before Oct. 12. “I do not expect any issues or delays.”

The Mitchell deal, announced first, will take longer. It only has one regulatory hurdle: approval under the Hart-Scott-Rodino Act, which was expected to be cleared by the end of last week, he said. Devon has already filed required changes it needed to make when it announced the Anderson deal, and he said U.S. officials should give their stamp of approval “in early October…We will work as hard as possible to receive clearance as early as possible.”

Regarding financing on the Mitchell acquisition, Nichols said that the tax-free structure for Mitchell shareholders will not change. After discussing the matter with Mitchell attorneys, Nichols said the companies will use a 351 tax structure. “We have discussed this with Mitchell and they think it is an excellent solution (and) will preserve the tax free status for Mitchell shareholders. We will see no hurdles in getting that done.”

If they amend their merger agreement, they would create a new holding company to ensure that the transaction remains tax-free for Mitchell shareholders. Under the existing agreement, Mitchell would merge with a subsidiary of Devon in a tax-free transaction to the extent that Mitchell’s shareholders would receive cash. Because of the decline in Devon’s stock price in recent weeks, the original agreement created doubt as to whether those opinions could be obtained at closing.

An amended agreement would require both parties to complete the transaction as structured if the tax opinions are available, but in the event that the opinions are not available, the parties would create a new holding company with Devon and Mitchell the subsidiaries. By doing this, Devon’s shareholders would exchange each of their Devon shares for one share of the new holding company and Mitchell shareholders would exchange their shares for .585 shares of the new company and $31 in cash.

The new holding company, which would keep the transaction tax-free except for the cash paid to Mitchell shareholders, would include Devon’s current board of directors along with Todd Mitchell, the son of the Mitchell CEO, George Mitchell.

When asked about Devon’s intermediate- and long-term price for oil and gas, Nichols responded that Devon’s long-term view is $2.75 for gas and $22 for oil. “We don’t change that very much (year to year). It was the same at the beginning of year, when the rest of the world was very much higher. We don’t vary that much. We run all acquisitions on a variety of price decks. We recognize that oil and gas prices are volatile,” he said, noting that at the prices Devon historically sets for oil and gas, the Mitchell and Anderson acquisitions will be “accretive on any of the price decks that we run.”

Asked about how low natural gas prices would have to fall before the company shuts in any production, Nichols said the “industry was already responding to that…the gas rig rate is dropping and will continue to drop, but all that does is set (the market) up for an even more robust market” next year.

“We are on the supply-demand equation, and the United States is tight and narrow,” said Nichols. “We have a weak economy at the moment, but push forward to next year, when there is a normal economy, (because) recessions don’t last forever. We’ll certainly look at curtailing operations to the extent it’s appropriate, but it’s speculation at this time. October is always the gloomiest month because storage is full and the drawing down doesn’t start until the first 10 days of November.”

Devon last week also issued an updated version of its hedging transactions, including previous hedged positions and its most recent transactions, going through the rest of 2001 and into 2002. Regarding its natural gas production for the fourth quarter of 2001 and the first six months of 2002, Devon said it has entered into costless collars covering approximately 149,000 MMBtu/d. The company reported that the average floor and ceiling prices for the costless collars are $2.89 and $4.39 per MMBtu, respectively. The costless collars will be settled using first-of-the-month published index prices in the regions in which the gas is produced.

To date, Devon said it has downside price protection in place for approximately 326,000 MMBtu/d in the fourth quarter of 2001 at an average price of $3.18/MMBtu. For comparison, Devon’s second quarter 2001 actual production was approximately 1.2 Bcf/d. In aggregate, including previously disclosed transactions, Devon has downside price protection in place for approximately 466,000 MMBtu/d in 2002. This downside price protection is at an average price of $3.18/MMBtu.

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