The decision last week by New Orleans-based Energy Partners Ltd. (EPL) to terminate its agreement to buy Stone Energy Corp. will allow the company to pursue other alternatives, including a sale. But EPL’s most likely buyer, Australia’s Woodside Petroleum Ltd., hasn’t put enough money on the table, EPL told shareholders last week. Stone, meanwhile, is expected to continue to look for a buyer.

EPL in June successfully carved out a deal to purchase Lafayette, LA-based Stone for $2.2 billion after outbidding Stone’s original suitor Plains Exploration (see NGI, June 26). EPL in turn was pursued by Woodside subsidiary ATS Inc. Energy Partners, but EPL rejected a takeover bid of $880 million ($23/share) last month (see NGI, Sept. 18). The Woodside bid was contingent on EPL not completing the Stone merger.

However, Woodside has not given up. Its offer for EPL was extended two weeks ago to Friday (Oct. 20) after a court ruling allowed EPL to enter into third-party talks (see NGI, Oct. 9).

“While dual path negotiations helped to assure the floor valuation for EPL shares, the absence of [Stone] SGY is nevertheless good news for EPL shareholders,” noted Friedman, Billings, Ramsey & Co. Inc. (FBR) analysts David Khani and Andrew Coleman. In a note to clients, they said they remained “confident that the current $23-$24/share bid for EPL is too low and will be raised,” likely to around $26/share.

Following its announcement to terminate the Stone transaction Thursday, EPL’s shares gained 94 cents, nearly 4%, to close at $25/share. Stone’s shares were up 2.5%, or 96 cents, to close at $39.50.

In a research note, Merrill Lynch’s John Herrlin said, “It’s clear that EPL now recognized that the merger wasn’t well received and, as we’ve pointed out, very earnings dilutive.” Since it was given the go-ahead to speak to other parties, “EPL’s management has obviously rethought its strategies as an ongoing entity or potential sales target with ATS or others.”

EPL will pay Stone an $8 million termination fee. EPL and Stone also have agreed to release all claims between them relating to their merger agreement. The $8 million payment is a $17.6 million discount from the fee that would have been payable to Stone under certain circumstances, EPL stated.

“While the EPL board believed that the addition of Stone’s complementary properties and assets would have been an excellent strategic fit for us, the board has concluded that the exploration of strategic alternatives is in the best interests of EPL stockholders,” EPL said in a statement.

EPL’s board of directors, assisted by financial advisers Evercore Group LLC, Banc of America Securities LLC, Petrie Parkman & Co. Inc. and UBS Securities LLC, has directed the company to “explore strategic alternatives to maximize stockholder value, including the possible sale of the company.” It said EPL’s “solid track record of operational success and the strong potential of our attractive Gulf of Mexico properties and prospects place us in a strong position to explore strategic alternatives to maximize value for our stockholders.”

EPL said it would not disclose any developments regarding its negotiations until the board makes a decision regarding a specific course of action.

Stone now is in the process of “evaluating strategic alternatives,” said FBR analyst Rehan Rashid. “We continue to believe that a heavy [Gulf of Mexico] GOM shelf bias is not a viable business model for a company of SGY’s size…Thus we are of the opinion that management should still sell the company.” Rashid said, “clearly, SGY is at the bottom of the pack when it comes to execution and meaningful relative upside from an operational perspective. We note that we would expect the company to announce a strategic plan before year-end.”

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