The latest buzz in the oil-patch and on Wall Street is thatindependent producer and marketer Noble Affiliates Inc. of Ardmore,OK, may acquire competitor Ocean Energy Inc. in a transaction thatwould catapult the combined company into the ranks of one of thetop gas producers in the United States.

There have been “very, very loud rumors” of a possible dealbetween the two independent oil and gas producers since last week,said Irene Haas, an E&P analyst with Sanders Morris Harris inHouston. In fact, shares of Houston-based Ocean Energy and NobleAffiliates traded at new 52-week highs on Monday amid speculationof a pending marriage. The momentum carried over to yesterday, withOcean Energy closing at 15 11/16 and Noble finishing the day at 397/16.

Is there any basis for the scuttlebutt?. The financial analystswho cover the companies concede they have no direct knowledge thata Noble-Ocean Energy combination is imminent. “I haven’t confirmedanything with the company [Ocean Energy]. Nothing’s a done dealuntil signatures are on paper……[But] I think wherever there’ssmoke there’s usually fire,” said Lewis Ropp, an energy analyst forDallas-based Frost Securities, which tracks Ocean Energy. “Iwouldn’t be surprised to hear something very shortly. Thereprobably are serious discussions taking place now.”

The companies won’t confirm anything. “We can’t comment on arumor,” said Ocean Energy spokeswoman Janice Aston White. She notedreports of a Noble-Ocean Energy union have been rampant for a”couple of weeks,” but they were further fueled Monday when FrostSecurities’ Ropp spoke out on the “merits of a deal” between thetwo companies.

A Noble-Ocean Energy company would provide “synergies and costsavings” of as much as $100 million for the two producers, Ropptold NGI. He noted that both Noble and Ocean Energy are significantgas producers, with gas accounting for about 70% of Noble’sproduction and 50% of Ocean Energy’s production. Also, theirE&P activities “overlap in core areas” – the Gulf of Mexico,West Africa and Israel.

Ropp believes a marriage with Noble Affiliates would appeal toOcean Energy, based on the interest that Ocean Energy showed whenAnadarko Petroleum Corp. announced plans to buy Union PacificResources. Ocean Energy was “very supportive of that” deal becauseit believes further consolidation of the production sector iswarranted to be competitive, he said.

Also, Ropp noted Ocean Energy may view this opportunity asanother Seagull Energy, which it merged with in 1999. “I think thatthey could repeat that” success, he said. If Noble should make aplay for Ocean Energy, it would be the third merger transactionthat Ocean Energy’s been involved in since 1998. First, it mergedwith United Meridian Corp. in March 1998, creating the ninthlargest independent producer based on total market capitalization.Then in early 1999, it hooked up with independent producer SeagullEnergy – a move that weighted the company more toward natural gasthan crude oil in terms of reserves and production.

Although she has no first-hand information on whether such adeal is in the offing, Sanders’ Haas believes the success of aNoble-Ocean Energy marriage will depend on how much Noble iswilling to pay for Ocean Energy. If Noble would overpay, it wouldbe dilutive to earnings, she cautioned.

What would be a fair price? “Anything not exceeding 0.5 share ofNoble [which is trading at roughly $39] for each share of OceanEnergy,” Haas said. “It could work under the right exchange ratio.”

If Noble Affiliates should acquire Ocean Energy, it would resultin a company with a market capitalization of slightly more than $5billion. The combined company “would be comparable in size toApache [Corp.],” Haas noted. It would be roughly 60% natural gasproduction, would have a “decent” balance sheet, and would have a”lean” cost structure, she said.

Noble Affiliates is engaged in the exploration, production andmarketing of oil and gas in the U.S., Canada and Africa. It justreported first-quarter net income of $26.8 million, or 48 cents ashare, on revenues of $271.7 million. This compares to a net lossof $8.9 million, or 16 cents a share, on revenues of $177.9 millionfor the same period in 1999.

Financial analysts expect good things for Noble Affiliates thisyear and next profit-wise. They project earnings of $1.48 per sharein 2000 and earnings of $1.58 in 2001. This represents an increaseof 71.5% over 1999’s earnings of 86 cents per share, and a furtherboost of 6.8% in 2001.

Ocean Energy also reported better results for the first quarter.It had income of $43 million, or 25 cents per fully diluted share,on revenues of $246 million. This compares to a net loss of $81million on revenues of $106 million for the first quarter of 1999.Last year’s first-quarter results were impacted by one-time chargesrelated to the company’s merger with Seagull Energy and the sale ofits Canadian subsidiary.

In the U.S., Ocean Energy’s E&P activities are focused onthe shelf and deepwater areas of the Gulf of Mexico, the PermianBasin, Midcontinent and Rocky Mountain regions. Like Noble, it alsohas operations in West Africa and a number of other foreigncountries.

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