Houston-based Newfield Exploration Co. has pumped up its core South Texas natural gas assets and more important, moved into the deepwater of the Gulf of Mexico, with the acquisition of cross-town peer EEX Corp. The transaction is valued at $640 million, including debt, and has already been approved by both boards of directors. Newfield, already dominant along the Outer Continental Shelf, gained its first foothold in deeper water, picking up 68 lease blocks, most of which EEX was exploring with Shell Oil Co.
EEX, formerly the oil and gas exploration arm of Enserch, had been viewed as a strong takeover candidate after struggling in the wake of Enron Corp.’s bankruptcy. As EEX CEO Tom Hamilton explained, unfortunately the company had gone to the bond market to secure credit on Sept. 11, 2001. After the bond market closed that day, EEX had trouble renegotiating a new line of credit, and it owed Enron money. EEX was not given approval in time to meet the expiration date of its credit line by the U.S. Bankruptcy Court in New York, which is handling Enron’s case, and had been searching for a way to make its payments so that it could free up its substantial assets to secure a new line of credit.
“We had no balance sheet,” said Hamilton, “and we needed to get our assets with someone who has one. The very important thing is, this puts a balance sheet behind our assets, which they needed.” EEX’s shares have been trading at all-time lows; they closed Wednesday at $1.90 while Newfield closed at $36.55.
Newfield CEO David A. Trice said his company had actually approached EEX about a merger 18 months ago because it was interested in the overlapping assets. Hamilton said the Newfield proposition had been one of several, but in the end, agreed that the deal would be a great fit, backing EEX assets, and balancing Newfield’s asset base.
Important to Newfield was the entry into deepwater, which Trice said the company had been “cautiously” pursuing. When the deal is completed, Newfield will have about 85% of its asset base in natural gas, with 95% of it in North America. About 54% of the assets will be onshore in the United States; 43% in the Gulf; and 3% in Australia.
Reserve-wise, the combination will give Newfield 1.3 Tcfe, with 43% in the Gulf; 35% onshore Gulf Coast; 19% in the Midcontinent; and 3% in Australia. Production-wise, Newfield will have 53% in the Gulf; 32% onshore; 11% Midcontinent; and 4% in Australia. “We’ve come a long way from 77 MMcf we had when we went public in 1993,” said Trice.
The combination creates an especially strong offshore asset base, said Trice, with 220 blocks on the Shelf and another 68 in deepwater. Of the deepwater blocks, EEX is in partnership with Shell on 49 of them. Before the announcement, Newfield had 190 Shelf blocks, with none in deepwater.
“It’s a great zip code to be in [if you are going to be] in the deepwater,” said Trice, referring to Shell’s proven track record on discoveries in the region. Calling EEX’s offshore assets the “hidden jewels,” Trice said that Newfield would ramp up exploration beginning as early as the fourth quarter. EEX has not been able to take advantage offshore, he said, but holds interests in several deepwater discoveries, including Llano, Jason and Devil’s Island. It also holds 550-plus blocks of deepwater 3-D seismic coverage, as well as a joint interest in BP’s Alliance block in the “ultra-deep” water.
In South Texas, Newfield will pick up 114,206 developed acres and 245,354 undeveloped acres from EEX, giving it a total pro forma estimate of 131,583 developed acres and 278,049 undeveloped acres — 409,635 total. In South Louisiana, EEX will add 542 developed and 29 undeveloped acres to Newfield’s asset base, giving it a total of 134,831 acres overall. Trice said EEX has 61 producing fields onshore, and said there were “significant” discoveries possible that may add to the reserve base.
Newfield plans to combine the existing workforces, and did not disclose whether there would be any attrition. Trice said the company also plans to sell EEX’s floating production system offshore, which he said was worth an estimated $70 million. The system includes 53 miles of pipelines in the Auger Basin, a shallow-water processing facility and excess equipment.
The agreement will make the 13-year-old Newfield the 15th largest independent exploration and production company, with EEX shareholders owning about 12% of the company. Newfield will issue 7.1 million shares, with 4.7 million going to EEX preferred stockholders and 2.4 million to common shareholders. The common shareholders also will have an option to receive units in the company’s Treasure Island assets in the Gulf.
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