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Merged Devon, Ocean Energy to Focus on North American Gas Production
Devon Energy said last week it plans to acquire competitor Ocean Energy Inc. in a $5.3 billion stock-debt assumption transaction that will create the largest U.S.-based independent producer, with a major focus on North American natural gas.
The merged companies to be called Devon Energy Corp. will be headquartered in Oklahoma City, OK, and will have total production of approximately 650,000 equivalent barrels of oil a day, with 90% of it “heavily weighted” toward North American production and 63% weighted toward natural gas, said company officials. The company will have an enterprise value of an estimated $20 billion when the merger is completed, according to Devon Energy.
It will produce approximately 2.4 Bcf/d of natural gas, which is more than 4% of the gas consumed in North America on a daily basis, and an estimated 250,000 barrels of oil and natural gas liquids per day. This not only will make Devon Energy the top independent in the United States, but it said it will exceed the gas production of some of the majors — Chevron Corp. and Shell.
The boards of directors of Devon Energy and Houston-based Ocean Energy approved the deal on Feb. 23. It still must be approved by federal antitrust authorities, the companies’ shareholders, and possibly the Securities and Exchange Commission (SEC). If SEC review isn’t required, the transaction could close in May, said Devon’s current Chairman J. Larry Nichols. But if it is required, he noted it would take longer.
Under the merger agreement, Ocean shareholders will receive 0.414 shares of Devon Energy common stock for each common share of Ocean Energy. The exchange ratio is based on the relative market prices of the two stocks over the past 30 trading days. Devon will be required to issue 73.4 million new shares to Ocean’s shareholders. Based on Devon’s closing stock price of $48.23 a share on Feb. 21, the total value of the stock to be issued will be approximately $3.5 billion. The entire value of the transaction is about $5.3 billion, including the assumption of Ocean’s debt and other obligations, Devon Energy said.
“You put these two companies together and we think you have really an outstanding company,” Nichols said during a webcast conference with financial analysts last Monday. The merger transaction will “enhance our strengths and…solve our weaknesses,” he said, noting the two producers complement each other from a production and financial standpoint.
Devon has a strong North American onshore position, with significant coal-bed methane and black-shale activities, and a presence in the U.S. Rocky Mountains, Mid-Continent, Permian Basin and in Canada, he noted. Ocean Energy, in contrast, has a “proven track record” in the deepwater Gulf of Mexico, Canada and other international areas, such as Equatorial Guinea, the Panyu Development in China, and Azerbaijan (north of Iran).
Moreover, Nichols said Devon has a near-term surplus cash flow of $800 million to $1 billion, which he said could be used to bring Ocean Energy’s already-identified projects onstream. He believes this is a much better investment option for Devon Energy, rather than spending money on exploration projects that have no chance of adding reserves in 2003 or 2004.
In addition to its offshore expertise, Nichols said Ocean Energy brings to the table a lower debt-to-capitalization ratio than Devon Energy. As a result, he believes the long-term debt-to-cap ratio for the combined company will be 52% compared to Devon Energy’s current 61%, and possibly will fall below 50% by the end of the year.
He estimated the merger would result in synergies of $50 million. Nichols said he also anticipates the combined company will see a multi-year growth rate of 4-6%.
He noted that Devon Energy and Ocean Energy had capital expenditures of $1.5 billion and $1.3 billion, respectively, last year, and he expected the new company to maintain that level going forward.
Upon completion of the merger, Nichols will retain the positions of chairman and CEO in the new company, while Ocean Energy Chairman James T. Hackett will be named president and chief operating officer. The board of directors will include nine members from Devon and four members from Ocean.
The new company is expected to have approximately 2.2 billion barrels of oil equivalent proved reserves, with 84% of the reserves located in North America. Worldwide Devon Energy said it will hold 29 million net undeveloped acres. And with interests in more than 500 deepwater Gulf of Mexico blocks, the company boasts it will be the largest independent deepwater leaseholder in the Gulf.
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