Onshore natural gas explorer Edge Petroleum Corp. and privately held Chaparral Energy Inc. Wednesday scuttled a merger plan citing “no reasonable expectation” that financing could be completed by the Dec. 31 deadline. The majority owner of Chaparral is co-founder Mark Fischer; Chesapeake Energy Corp. purchased a 32% stake in the company in 2006.
Edge was trading down early Wednesday at around 29 cents/share, and it now is considering “strategic alternatives” that include an outright sale of the company.
Under the merger agreement announced in July, Oklahoma City-based Chaparral had planned a reverse merger in which it would buy Edge and become a public company (see Daily GPI, July 16). The agreement hinged on successfully refinancing Chaparral’s existing borrowing base revolver to $1 billion from $600 million, as well as selling stock through a $150 million equity infusion from Magnetar Financial LLC, a private equity firm.
It was one year ago that Edge, headquartered in Houston, began searching for a partner (see Daily GPI, Dec. 20, 2007). At that time CEO John W. Elias said there was “a sense of urgency” to complete an agreement to increase shareholder value. Edge explores along the onshore Gulf Coast from South Texas to Mississippi, as well as in the Permian Basin and Arkansas’ Fayetteville Shale. Production at the end of last year was around 60.9 MMcfe/d net, with net proved reserves of 163.5 Bcfe.
Chaparral primarily develops mature oil and gas properties using enhanced oil recovery techniques, mostly in the Midcontinent and the Permian Basin. It also has assets across Texas, along the Gulf Coast and in the Rocky Mountains. Proved reserves at year-end 2007 totaled 987 Bcfe, which were 65% proved developed and 60% weighted to oil. Average daily production was 111.3 million boe/d at the end of 2007.
With the merger canceled, Edge Wednesday said it would work to repay “any borrowing base deficiency, to the extent it is able to do so, using a combination of cash on hand, adjustments to future capital spending, and potential cash proceeds from any transactions consummated as a result of Edge’s strategic alternative review process. However, there can be no assurance that any of these alternative methods of repaying any borrowing base deficiency will be attainable, especially in light of current conditions in the financial and credit markets and the oil and gas industry.”
Edge said it is “working to establish a new borrowing base under its secured credit facility but believes its lenders may propose a significant reduction in the borrowing base due to declines in commodity prices and its restricted capital budget, which have inhibited its ability to replace reserves.” The producer said “in light of the conditions,” it would not pay the January dividend on its 5.75% series A cumulative convertible perpetual preferred stock.
Chaparral canceled the equity agreement with Magnetar, and under terms of their agreement, Magnetar has to pay Chaparral a $5 million termination payment, and Chaparral will pay Edge $1.5 million for reimbursement expenses.
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