Houston-based Plains Exploration & Production Co. will be adding exploration expertise and properties weighted toward natural gas with its agreement to acquire 3TEC Energy Corp., announced Monday. Plains said it has a definitive agreement to acquire 3TEC for a combination of cash and stock valued at $432 million.

Plains said the acquisition is expected to be immediately and significantly accretive to its earnings and cash flow. Based on a 3TEC transaction value and $80 million of unproved properties, the transaction implies a proved reserve purchase price of $1.19 per Mcfe. Under the agreement, 3TEC stockholders will receive $8.50 in cash and 0.85 shares of Plains’ common stock for each share of 3TEC common stock, subject to certain adjustments based on Plains’ share price prior to closing.

Following the acquisition, Plains said it will have an expected enterprise value of over $900 million. The company will gain significant exploration potential in the Gulf Coast region of South Louisiana. Houston-based 3TEC also has a three-year exploration drilling inventory with multiple separate prospects, which complements the development program at Plains, including the Inglewood field in Southern California. In addition to the synergy areas, Plains will also gain new core areas in East Texas and the Gulf Coast, both of which have strong growth potential.

Plains’ new production mix is expected to be made up of 37% natural gas and 63% oil, and a proved reserve base that will be 19% natural gas and 81% oil, with total proved reserves of 302 MMboe at year end 2002. Production should increase in excess of 50% as a result of the acquisition.

“3TEC’s high quality, natural gas-oriented properties bring more balance to our reserve base and production mix and diversity to our risk profile,” said Plains CEO James C. Flores. “Additionally, the recent exploration success 3TEC has had in South Louisiana is very exciting and we believe its continuation will lead to substantial organic reserve and production growth. 3TEC’s high impact exploration program is very complementary to [Plains] substantial inventory of low-risk development drilling. After the acquisition, [Plains] will have the prospect inventory, financial flexibility and technical capability to deliver significant production growth through the drillbit and be opportunistic regarding further acquisitions.”

Plains said it anticipates funding the cash portion of the transaction through a new credit facility. Both boards have approved the merger agreement and each has recommended it to their respective stockholders for approval. Post closing, 3TEC stockholders will own approximately 40% of the combined company and Plains stockholders will own approximately 60% of the combined company subject to adjustments under a collar mechanism. The companies anticipate completing the transaction in the second quarter of 2003.

Flores will remain as chairman and CEO and Plains’ current executive staff will continue in their capacities. Plains’ board of directors will increase by two directors to be appointed by 3TEC.

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