In a move that combines two leading California oil operators and achieves significant operational synergies, costs savings and cash flow benefits, Plains Exploration & Production Co. (PXP) announced that it is buying Nuevo Energy Co. in a stock-for-stock transaction valued at $945 million, including debt assumption, or about $28.05 per Nuevo share ($4.54/boe).

The deal would create a company with about 120 MMcf/d of domestic natural gas production, 64,000 bbl/d of domestic oil and liquids production and 489 million barrels of reserves (349 million in the proved developed category) of which 97% are in the United States. It amounts to a 62% increase in reserves, 83% of which are oil, for PXP. About 81% of the reserves are located in California, where the combined company would account for about 6% of total state oil production.

“This transaction provides operational synergies, an enhanced portfolio of exploitation and exploration prospects funded by substantial future cash flow, and an increased exposure to natural gas,” said Nuevo CEO Jim Payne.

“With cost reductions, non-core asset sales and balance sheet deleveraging largely completed, further stock price appreciation will be more a function of Nuevo’s growth profile,” he said. “In this respect, we are excited about this merger and believe it will generate significant value for Nuevo shareholders.”

Nuevo stockholders will receive 1.765 shares of PXP’s common stock for each share of Nuevo common stock. Upon closing, PXP stockholders will own 53% of the combined company and Nuevo stockholders will own 47%. Plains said the deal would significantly improve its balance sheet and provide an attractive growth profile. It plans to issue up to 37.4 million shares to Nuevo shareholders and assume $234 million of net debt and $115 million of trust convertible preferred securities.

“This accretive transaction represents a real opportunity for the shareholders of both companies to benefit from combining the strengths of PXP and Nuevo while eliminating a significant amount of the cost required with two separate entities,” said PXP Chairman James C. Flores, who will remain chairman and CEO of the new company. PXP’s current executive staff will continue in their capacities. “Financially, the combined companies’ credit statistics will continue to improve as available free cash flow is used to retire debt and subsequently to fuel additional growth opportunities in the future.”

The transaction is expected to be immediately accretive to PXP’s per share cash flow for 2004. Cost savings of the combined company are expected to exceed $20 million annually. PXP also believes that it can absorb Nuevo and consolidate operations in Houston with a minimal increase in overhead, thus eliminating most of Nuevo’s general and administrative expenses. Significant savings are expected in the areas of personnel, systems, insurance and public company expenses.

PXP said its total cash costs per unit of production will decline as reductions in interest and general and administrative costs per barrel will offset slightly higher average lifting costs per barrel.

The combined company’s large exploitation inventory onshore and offshore California and in South Louisiana is expected to provide continued production and reserve growth. PXP and Nuevo possess complementary asset bases that are concentrated in California’s most prolific oil producing basins. The combined technical expertise and core area overlap provides opportunities for operational synergies, PXP said.

PXP expects that its pro forma average daily production for 2004 will be 85,500 boe/d, which is 25% natural gas and 75% oil. PXP’s proved developed reserves as a percentage of total reserves are expected to increase to 71% from 58% while the reserve-to-production ratio will decrease from 19.8 years to 15.8 years.

The combination also is expected to provide the company with greater access to capital at a lower overall cost. The debt to capitalization of PXP will be reduced from an estimated 59% to 49% after the acquisition. Other measurements, such as debt per barrel of proved developed reserves and debt to cash flow also will be improved.

Standard & Poor’s put its BB-minus ratings on Plains and Nuevo on CreditWatch with positive implications, citing the expected operating efficiencies, production hedging, and scale of the combined companies’ California business that would result from a deal.

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