Pioneer Natural Resources Co., a Dallas-based independent oil and natural gas producer, announced plans Tuesday to acquire a leading developer of coalbed methane (CBM) reserves in the Rocky Mountains, Evergreen Resources Inc., for an estimated $1.78 billion in cash and stock, plus the assumption of $300 million in debt.

Under the terms of the deal that was approved by the boards of directors of both companies, holders of 44 million shares of Denver, CO-based Evergreen common stock will receive a total of 25 million shares of Pioneer Resources’ common stock and $850 million in cash. This represents a price per Evergreen share of $39, based on Pioneer’s reported sale price on May 3 of $33.52 per share.

Pioneer Natural is expected to finance the transaction by taking on about $1.1 billion of new and assumed debt, and the balance with the issuance of new common equity.

Immediately following the announcement, Standard & Poor’s Rating Services affirmed its ‘BBB-‘ corporate credit rating on Pioneer Natural, but it revised its outlook on the company to negative from stable. “The negative outlook on Pioneer reflects that a downgrade is possible if the company fails to complete the $600 million debt reduction plans that its management [previously] outlined to Standard & Poor’s,” the credit rating agency said. It also expressed concern about Pioneer’s ability to “capture the value” of Evergreen’s CBM reserves.

The merger, which is subject to antitrust review and the approvals of the stockholders of both companies, is expected to be completed at the end of the third quarter, according to Pioneer Natural Resources. Pioneer will continue to be headquartered in Dallas following the completion of the deal, and Evergreen will retain its Denver offices as its base of operations in the Rockies.

The union will bring together two independents with widely different exploration and production (E&P) focuses — Pioneer’s activities primarily are concentrated in the Gulf of Mexico and overseas, while Evergreen is fixed on the Rocky Mountain and Canadian regions.

Citing the benefits of the merger, Pioneer said it will provide the company with “some of the best long-lived gas assets in North America,” and “low-risk drilling opportunities” to balance its drilling program. In addition, the marriage will give Pioneer “unconventional gas expertise,” and “substantial Rockies acreage position in key growth basins,” as well as bolster the company’s Canadian asset portfolio, it noted.

The merged company will have proved reserves of 1,038 million barrels of oil equivalent (boe), or 6.2 Tcf of natural gas equivalent, based on audited reserve estimates at the end of 2003, according to Pioneer Natural Resources. An estimated 59% of its proved reserves will be natural gas and 86% will be located in North America, it said.

Evergreen is expected to account for about one-third of the proved reserves of the new company, essentially all North American natural gas. Evergreen’s year-end proved reserves of approximately 1,495 Bcf of natural gas equivalents (Bcfe) were concentrated in two Rockies basin, Raton (94%) and the Piceance/Uintah (4%), and in southern Canada (2%).

Pioneer Natural said the combined company has current production of approximately 838 MMcf/d of gas, and 71,000 barrels of liquids per day, and a reserves-to-production ratio of 16 years.

Evergreen produced 127 MMcf/d of natural gas equivalent in 2003, is currently producing approximately 150 MMcf/d of gas equivalent and expects to average about 160 MMcf/d during 2004, according to Pioneer. It projects that production from Evergreen’s assets will likely double by 2008.

“Evergreen’s focused strategy and quality long-lived properties in the Rockies will establish the ideal new core area for Pioneer, in line with our strategy of building a stable foundation with excess cash flow to invest in high-return opportunities,” said Pioneer Chairman Scott Sheffield. Assuming the merger is completed in the third quarter, he anticipates that 2004 production for the combined company will range from 70 to 73 million boe, with growth of 10% to 15% expected in 2005.

Pioneer further noted that Evergreen’s reserves-to-production ratio is one of the longest in the industry at approximately 32 years. As a result, the capital required to replace Evergreen’s annual production will be minimal, estimated at about 15% of the projected 2004 cash flow, it said.

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