Fueling rumors that USX-Marathon Group may separate its steeland energy businesses and then sell a beefed up oil and gasbusiness, Houston subsidiary Marathon Oil put together a $500million deal to acquire two-year-old Pennaco Energy Inc., a companywhose key assets are tied to coalbed methane (CBM) gas productionin the Powder River Basin of northern Wyoming and southern Montana.
To make the deal, Marathon will pay about $19 a share — $446million in cash, including $54 million for Pennaco’s debt. Thedeal, announced after trading ended last Friday, was agreed to byboth companies’ boards, and represents a 30% premium to Pennaco’sprice of $14.63 on Dec. 22. Marathon said it would make a cashtender offer on or about Jan. 8, 2001 for 100%, but not less than amajority, of the outstanding Pennaco shares on a fully dilutedbasis.
Denver-based Pennaco is one of the largest leaseholders in thePowder River play. It has more than 400,000 net acres and currentnet production of more than 50 MMcf/d. Net proven reserves areestimated to be 200 Bcf, with more than 800 Bcf of potential.Marathon estimates that the acquisition and development costs ofPennaco’s proven plus probable reserve base will be about$4.50/boe.
“Much of the growing global demand for energy will be met bynatural gas, and this is particularly the case for the UnitedStates,” said Marathon president Clarence Cazalot. “The NorthAmerican gas market is a core area for Marathon, and thisacquisition will enhance our already strong presence. Its assetswill provide a significant new reserve base that we can develop anddeliver quickly to the marketplace.”
Cazalot called Pennaco a “well run, highly regarded company withan entrepreneurial spirit.” He said it was a “great strategic fitwith our growing North American gas business. The shallow, morerapidly drilled CBM wells will complement our focus in Oklahoma ondeeper, higher productivity wells and result in a more balancedportfolio of growth opportunities.”
Pennaco CEO Paul M. Rady said, “Marathon’s tender offer reflectsthe proven and potential value of Pennaco. Over the past two andone half years, Pennaco’s management team and employees have madeoutstanding progress in building and developing our position in thePowder River Basin coalbed methane play. We are very proud of ourcompany’s accomplishments and believe that it is Pennaco’s growthpotential that has attracted an outstanding company like Marathonto our organization.”
Although Pennaco’s assets are positive, it has had disappointingproduction results in recent months. In October, Pennaco reviseddownward its estimate of natural gas production for the fourthquarter, saying it would produce between 58 MMcf/d and 63 MMcf/d ofgas net, compared with a previous target of 70 MMcf/d to 75 MMcf/d(see Daily GPI, Oct. 20).
Pennaco said then that several of its competitors had installedmini-compressors at the wellhead on properties adjacent toPennaco’s producing wells, which increased production rates on thecompetitor wells and temporarily reduced Pennaco’s production. Twomonths ago, Pennaco installed its own blowers to resume a higherproduction rate. The company also reported a slower rate ofproduction than expected on its Felix and Fitch Ranch projectsbecause of persistent downhole water pump problems. Those glitchesalso have been resolved.
Despite some recent problems, Pennaco also has had amazingsuccesses. Earlier this month, the Wyoming Department of EnvironmentalQuality, which has slowed the water quality permit approvals processin recent months, gave the green light for four of Pennaco’s futuredrilling projects (see Daily GPI,Dec. 8). It has about a dozen more permits awaiting approval bythe state.
Marathon has undergone a lot of changes in the past year,including a restructuring effort that is continuing. In November,USX Corp. unveiled plans to review its criticized tracking stockstructure of both Marathon Oil and U.S. Steel, which included thepossibility of selling one or both units. USX CEO Thomas Usher toldfinancial analysts then that legal and financial advisers had beenhired to look at alternatives to the stock structure of Marathonand U.S. Steel, a process that he said would take several months.
Analysts have criticized the tracking stock setup, which wasestablished in the early 1990s. They said the combination leavesMarathon Oil’s stock heavily undervalued, and have hinted thatselling the unit makes the most sense. Through tracking stocks, USXcontrols both companies, but it allows investors to put funds intoeither business, with securities tied to the value of Marathon orU.S. Steel. However, separating the companies could add as much as10% to both companies, say some analysts.
Marathon, the No. 5 U.S. oil company, also has had otherfinancial problems. Earlier this year, it began to overhaul itsbusiness, restructuring its savings targets and installing a newmanagement team. It cut its overall exploration and productionworkforce by 25% and began an early retirement program. Worldwide,E&P employees have fallen to below 3,000, about 24% less thanat the end of 1999.
Marathon also said it would focus on three or four new E&Pareas and deepwater projects. Oil and gas production in 2001 isexpected to be about 3% higher, or about 430,000 bbl/d, up from416,000 bbl/d expected this year.
While some of the cutbacks have helped the bottom line, E&Phas not done as well. In November, Marathon said that poor drillingresults are leading to a $200 million oil and gas write-down chargein the fourth quarter, with a downward revision of about 100 MM bblin reserves.
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