In a deal that creates a formidable independent in the Gulf ofMexico basin, Stone Energy Corp. will purchase Basin ExplorationInc. in a tax-free, stock-for-stock merger worth $410 million,including the assumption of $48 million in debt. Stone, whichoperates exclusively in the Gulf, will pick up Basin’s sizable 3Dseismic knowledge base in the Gulf and add proven Rocky Mountainassets.

Stone President D. Peter Canty said yesterday that the mergerwould add 22 producing properties and 47 unexplored primary termlease blocks to the Lafayette, LA-based company’s current prospectinventory in the Gulf Coast basin. The transaction will increaseStone’s proved reserves as of year-end 1999 by nearly 54% to 596.9Bcfe, up from 38.4 Bcfe.

Stone’s current daily production would increase by 50% to nearly300 MMcfe/d from its current 200 MMcfe/d. Prospective undevelopedacreage would increase to nearly 267,000 acres from its current74,000. Pro forma reserves of the combined company would be about65% natural gas and 35% oil, with 87% of the reserves in the Gulf.

“We are confident that our combined cash flow, along with theenhanced inventory of high quality drilling opportunities thiscombination creates, will yield impressive growth,” Canty said.

Calling the merger a “compelling opportunity,” Canty said thatthe company, to be headquartered in Lafayette and remain StoneEnergy Corp., “creates a powerful company” with not only provenassets, but technical expertise. It will have a total marketcapitalization of approximately $1.5 billion ($1.4 billion inequity and $100 million in net debt), and a 23% pro forma totaldebt-to-book capitalization.

“We will have the capacity to do things better, with more provenreserves and more daily production,” Canty said. “We will now be ina position to compete head to head” with other Gulf of Mexicoproducers.

Basin brings not only proven Gulf properties, but its inventoryof 3-D seismic databases across the Gulf and reserves in the PowderRiver and Green River basins of Wyoming. Its properties are locatedprimarily offshore Louisiana and Texas. For the six months endedJune 12000, Basin’s total revenues rose to 42% to $47.4 million.Net income totaled $12.7 million, up from $3 million a yearearlier, mostly because of increased oil and gas production valuesin new fields offshore.

As part of the merger agreement, each company will implement ahedging program to lock in the cash flow value associated withapproximately 25% to 30% of the combined production from totalproved reserves over the next two years. In 2001, based on thecurrent outlook for commodity prices and the hedge security, thecombined company is expected to generate a growth rate indiscretionary cash flow of more than 20%. Canty said the naturalgas would be hedged at $3.50 Mcf, and the oil would be hedged at$25 a barrel.

During a conference call Monday, Canty spent most of his timediscussing the new company’s expanded Gulf assets, and very littleon Basin’s Rocky Mountain assets. While the properties in theRockies are “important,” Canty stressed they are not the focus ofthe company’s future growth.

“Our focus will remain in the Gulf of Mexico,” he said. Basin’sRocky Mountain assets total about 13% of the combined company’sreserves, but only 3% of the production. “I’ve seen severalexciting opportunities in those assets, several meaningful assets.”He did not disclose whether the Powder River and Green River basinproperties would be sold, saying the properties have a “future”with the new company.

Basin CEO Michael Smith called the merger a “win-win” situation,and added he was excited about the combined strength of the merger.While adding to Stone’s Gulf base, the merger also gives Basin theability to “spread its production risk” over its significantexploration assets there, he said.

“Stone is the right fit for us in every way, from the locationand the scope of their exploration projects, to their long-termstrategic objectives, and a corporate culture with values that weshare,” Smith said.

Canty will become CEO of the combined company. Founder James H.Stone had already announced plans to retire at the end of the year,but will remain chairman. Smith, who owns 15% of Basin’s stock,will become a board member following the merger.

In the transaction, which is expected to close early next year,Canty said that Basin stockholders would receive 0.3974 shares ofStone for each Basin share. Stone shareholders would own 71 % ofthe company; Basin shareholders would own the other 29%. Based onStone’s closing price of $54.16 on the New York Stock Exchange Oct.27, the offer equals $21.52 a share, representing a 10% premiumover Basin’s closing price that day of $18.56 on the NASDAQ. Cantysaid that all of Basin’s employees would remain with the company.

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