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More deals expected in wake of Devon-Ocean merger If approved, deal would make Devon largest North American independent in production — ahead of Anadarko, EnCana and Occidental Petroleum Petroleum News Alaska
The pending blockbuster merger of big U.S. independents Devon Energy and Ocean Energy raises the bar for a possible new round of industry consolidation, analysts say.
Potential targets include a long list of exploration and production companies, such as Alaska producers Anadarko Petroleum and Unocal, as well as Ocean joint venture partner Kerr-McGee.
But leave it to Larry Nichols, Devon’s shrewd chief executive officer, to set the pace on consolidation. He has turned the merger and acquisition game into an art form with several key mergers, including PennzEnergy, Santa Fe Snyder, Anderson Exploration and Mitchell Energy.
Devon did it again two weeks ago with the announced friendly takeover of deepwater explorer Ocean Energy, an unexpected deal that involved no cash and no premium to Ocean stock. Under terms of the stock swap valued at $5.3 billion, including the assumption of $1.8 billion in Ocean debt, Ocean shareholders would receive 0.414 Devon shares and would own 32 percent of the merged company.
Moreover, the transaction would immediately improve Devon’s balance sheet, despite adding more weight to its more than $7 billion debt load. That’s because the sheer size of the new company, with an enterprise value of $20 billion, would serve to reduce Devon’s debt-to-capital ratio to about 52 percent from a steep 61 percent.
The deal, if approved by shareholders and regulators, would transform Devon into the largest North American independent production wise with 650,000 barrels a day of oil equivalent, putting Devon ahead of Anadarko, EnCana and Occidental Petroleum. Devon would rank about fourth in reserves with 2.2 billion barrels of oil equivalent. Devon primarily a gas producer Devon, primarily a North American natural gas producer, also gets a more balanced exploration and production portfolio with Houston-based Ocean, especially in deepwater Gulf of Mexico and offshore West Africa.
Analysts believe Devon may not be done with mergers, with Oklahoma’s Kerr-McGee most often mentioned as a possible takeover candidate to help round out Devon’s obvious desire for substantial, long-term reserves.
Like Devon, Kerr-McGee is based in Oklahoma and already holds a significant block of shares in Devon. Kerr-McGee also is a close ally of Ocean, partnering up with the company on several joint ventures including the Nansen-Boomvang complex in deepwater Gulf of Mexico. With Ocean alone, Devon would be the largest deepwater independent in the Gulf with more than 500 blocks.
Fahnestock & Co. analyst Fadel Gheit, who has been predicting another round of industry consolidation, believes a host of independents would be vulnerable to takeovers once high-flying commodity prices retreat to more realistic levels and stock values, making shareholders uneasy and perhaps open to takeovers.
“This is like musical chairs,” he said, “and once the music stops there is one less chair. Someone will be left standing with no place to sit but on the ground.”
Anadarko, currently the largest independent producer in the United States, “is now looking over its shoulder” following the Devon-Ocean deal, Gheit said. “Who is to say BP, ExxonMobil or Shell would not make an all-cash offer for Anadarko.”
In addition to Anadarko, Kerr-McGee and Unocal, Burlington Resources and Marathon Oil also could be vulnerable to takeover, Gheit said. Indeed, even Big Three North Slope producer ConocoPhillips could be a target, he added.
“ConocoPhillips wants to join the elite, but it is not yet big enough,” he said. “Unfortunately, when they decided to get bigger the others decided to get bigger by buying each other.”
Analyst: bigger is better And contrary to the claims of many companies, Gheit added, “bigger is better,” particularly for those larger producers that are struggling to increase or even maintain production. Devon is a classic example. The company’s own production last year increased 50 percent from 2001 due to the Anderson and Mitchell deals. But since the first quarter of 2002, output has decreased about 12 percent from 560,000 barrels of oil equivalent to 490,000 barrels of oil equivalent.
Small stake in Cosmopolitan unit Devon, while expressing little interest in Alaska, does hold roughly 2,400 acres of exploration lands in the state, inherited from Anderson Exploration, including a small stake in the ConocoPhillips-operated Cosmopolitan unit in Cook Inlet. But Devon does have solid footing in Canada’s Mackenzie Delta and is well positioned to take advantage of any Canadian Arctic pipeline built to transport natural gas to the U.S. Lower 48.
Both Ocean and its chief executive officer, James Hackett, have links to Alaska’s past. Hackett was the head guy at Seagull Energy, which once owned and operated Enstar Natural Gas Co. and Alaska Pipeline Co. Ocean eventually merged with Seagull and survivor Hackett became the new company’s CEO. Ocean eventually sold the Enstar system to Semco Energy, as well as its coalbed methane stake in Alaska’s Pioneer Unit to Denver-based Evergreen Resources.
Under the new Devon Energy, Nichols would retain his positions of chairman and CEO, while Hackett would become president and chief operating officer. The board of directors would consist of nine members from Devon and four members from Ocean. The deal is expected to close in this year’s second or third quarter, the companies said.
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