Just eight months after it merged with United Meridian Corp.,Ocean Energy Inc. agreed last week to merge with Seagull EnergyCorp. in a tax-free, stock-for-stock deal creating the 10th largestindependent U.S. oil and gas company based on a pro forma totalmarket equity capitalization of $1.8 billion.

The move is seen as targeting cost efficiencies. “In thisenvironment, we’re going to see more of that happen out ofnecessity,” said an anonymous equity analyst who follows bothcompanies.

The combined company will be named Ocean Energy Inc. and will beheadquartered in Houston. The two companies together will have abalanced mix of oil versus gas, domestic versus international, andexploration versus exploitation opportunities, and enhanced accessto capital. Management expects production and cash flow growth fromthe combination and anticipates generating cost savings exceeding$45 million annually.

“From Ocean’s perspective, I think it’s somewhat dilutive to thegrowth profile,” the unnamed analyst said. “Seagull’s assets werenot generating much in the way of growth, whereas Ocean’s were. Thecombination of the two does result in some near-term dilution inthe growth outlook.”

Ocean Energy holds properties with both domestic andinternational exposure organized into three operating units: TheGulf of Mexico, with operations focused in the shelf and deep-waterareas; International, with operations in West Africa’s C“ted’Ivoire and Equatorial Guinea, and exploration programs commencingin Angola, as well as in Pakistan, Bangladesh and Yemen; andOnshore North America, with operations in the Rocky Mountains andMidcontinent in the U.S. and in Western Canada.

The boards of each company approved the deal. In the merger,Ocean Energy will merge into Seagull, which will be renamed OceanEnergy Inc. Each old Ocean Energy shareholder will receive onenewly issued share of Seagull common stock for each Ocean Energycommon share, and all Seagull shares will remain outstanding. As aresult, new Ocean Energy will have about 165 million sharesoutstanding, of which about 61.5% will be owned by Ocean Energyshareholders and 38.5% will be owned by Seagull shareholders. Themerger will be accounted for as a purchase transaction and isexpected to close by the end of March.

James C. Flores, Ocean Energy’s current president and CEO, willbecome chairman of the combined company. James T. Hackett, whobecame Seagull president and CEO in September, will be presidentand CEO of the combined company. Barry J. Galt and John B. Brock,the respective chairmen of Seagull and Ocean Energy, will serve onthe board of the combined company. Management will own about 10.5%of the common stock of the combined company, including about 6.6%to be beneficially owned by James C. Flores.

“[Ocean] needed to get larger and lower their unit costs, andSeagull had pretty much expressed the same intent. I think it’sgoing to be pretty demanding that companies lower their costs. Allof a sudden, the $14 oil is no longer viewed as an aberration typeof event but something that’s going to be here a while,” saidStephen Smith, an equity analyst with Dain Rauscher Wessels.

On a pro forma basis, current daily production for the combinedcompany would be about 80 thousand barrels of oil and 622 MMcf ofgas, for a total of 184 thousand barrels of oil equivalent. It isestimated that the combined company will have proved reserves ofabout 500 million barrels of oil equivalent, with about 57% naturalgas and 43% oil. About 68% of proved reserves are located in NorthAmerica with the remaining 32% located internationally. Thecombined company will also have in excess of 22 million netundeveloped acres in 14 countries.

The capital expenditure budget for the combined company isexpected to be about $500 to $600 million in 1999, fully funded byexpected combined operating cash flows and from the disposition ofat least $100 million of non-core domestic and internationalassets.

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