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Plains takes Nuevo Energy in $945 million stock deal Companies have considerable overlap in core areas in California and South Louisiana, will have proved reserve base of 489 million barrels of oil equivalent Ray Tyson Petroleum News Houston Correspondent
Plains Exploration & Production Co., less than a year after taking out 3TEC in the company’s biggest deal ever, has agreed to acquire fellow independent Nuevo Energy in a $945 million stock deal that essentially doubles the size of the fast-growing company.
Plains management, which includes among its ranks John Raymond, the son of ExxonMobil Chairman Lee Raymond, pushed the merger primarily as a way to reduce costs and debt and to generate much-needed cash flow to pursue drilling projects, as well as to elevate the new company’s standing with investors and the banking community.
Nonetheless, investors initially flinched at the merger agreement as the shares of both companies dropped following the Feb. 12 announcement. For one, Plains agreed to assume Nuevo’s $234 million debt, a tidy sum that goes along with Plains’ own $488 million debt at year-end 2003.
But the fact that Plains reduced its own liability by $15 million between the 2003 third and fourth quarters “is further evidence of our commitment to use excess cash flow to reduce debt,” Raymond, the company’s president and chief operating officer, said in a conference call with analysts. Proved reserve base of 489 million boe The new Plains would have a proved reserve base of about 489 million barrels of oil equivalent, 349 million barrels of which fall into the proved developed category. About 97 percent of the reserves are in the United States. Upon completion of the acquisition, expected in the second quarter of 2004, Plains’ proved reserves would increase to 71 percent from 58 percent of total reserves.
Plains’ daily production would increase to about 85,500 barrels of oil equivalent from roughly 38,000 barrels per day. The mix includes 75 percent oil and 25 percent gas. Combined reserves would be 83 percent oil and 17 percent gas.
The marriage between Plains and Nuevo, with a considerable overlap in each other’s core producing areas, particularly in California and South Louisiana, was billed as a logical fit for both companies. Nuevo, which also has a strong presence in West Texas, already is the largest independent producer of oil and natural gas in California, with strong positions both onshore and offshore.
Last year Plains managed to pull off somewhat of a coup in environmental-minded California. After a multi-year struggle with regulators, the company was finally issued the necessary government permits to develop the offshore Rocky Point accumulation from platforms in its operated Point Arguello Unit. Rocky Point, which holds an estimated 20 to 30 million barrels of reserves, will require $120 million to $140 million in investment from Plains and its partners, including former operator ChevronTexaco.
Plains said the merger is expected to save the new company more than $20 million per year. “Plains 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,” the company said. Merger strictly a stock deal The merger is strictly a stock deal involving no cash liabilities other than Nuevo debt. Plains would issue 37.4 million shares to Nuevo shareholders, which equates to 1.765 shares of Plains common stock for each share of Nuevo common stock. The transaction was based on Plains’ Feb. 11 closing price of $15.89 per share and Nuevo’s $28.05 per share. Plains’ shareholders would end up owning about 53 percent of the combined company and Nuevo shareholders the balance.
James Flores would remain as chairman and chief executive officer of the new Plains, while current executives of Plains, including Raymond, would maintain their current jobs. Nuevo would fill two new positions on the board of directors.
“Plains will be in an enviable position to maintain a strong growth profile with an enhanced exploitation inventory, while generating a large amount of cash flow from its long-lived, low-maintenance cost producing properties,” Flores said.
Nuevo has undergone a major restructuring during the past two years, resulting in a dramatic increase in the company’s market value. In the past year alone, Nuevo’s stock has risen to as high as $29.09 per share from a low of $11.27 per share.
“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,” said Jim Payne, Nuevo’s chief executive officer. “In this respect, we are excited about this merger and believe it will generate significant value for Nuevo shareholders.”
In June 2003, Plains broadly diversified its U.S. property base with the acquisition of 3TEC, in a $403 million deal involving stock, cash and assumed debt. 3TEC’s properties were concentrated in East Texas and the Gulf Coast, both onshore and in the shallow waters of the Gulf of Mexico. That transaction gave Plains an additional 49 million barrels of oil and gas reserves, plus additional production of about 5,100 barrels of oil equivalent per day.
Over the past year, Plains also has seen its market value rocket to as much as $16.45 per share from a low of $8.08 per share.
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