Cimarex, Magnum Hunter to merge in $2.1B deal

Ray Tyson

Petroleum News Houston Correspondent

Cimarex Energy and Magnum Hunter, two of the fastest growing exploration and production independents in the United States, have agreed to merge in a $2.1-billion blockbuster said to be a win-win deal for both drillbit-oriented companies.

The combination of two relatively small independents, with Denver-based Cimarex as the acquirer, would produce “a very solid mid-size oil and gas company” with little debt and a pot load of prospects to drill, Gary Evans, Magnum Hunter’s chief executive officer, said in a Jan. 26 conference call.

“They (Cimarex) now have an inventory with Magnum Hunter to keep them busy for many years to come,” he said. Cimarex chief executive F.H. Merelli said his company thought long and hard before deciding to team up with Magnum Hunter, noting that Cimarex rarely makes acquisitions.

“We’re not a deal-making company,” he asserted. “We are basically drillers. We recognize that there are lots of things to do out there, and we really focused on this one.”

Under terms of the deal, which must be approved by the shareholders of both companies, Magnum Hunter shareholders would receive 0.415 shares of Cimarex common stock for each share of Magnum Hunter common stock owned.

Based on the closing price of Cimarex common stock on Jan. 25, the acquisition of Magnum Hunter’s stock would be valued at about $1.5 billion. Including the assumption by Cimarex of Magnum Hunter’s debt, which at year-end 2004 totaled $645 million, the total transaction was valued at roughly $2.1 billion.

Prior to closing, Magnum Hunter also plans to distribute a special dividend representing its 29.3 percent ownership interest in TEL Offshore Trust. The current market value of the trust units owned by the company is about $15 million, which would equate to a dividend value of 17 cents per Magnum Hunter share.

In effect, shareholders of Irving, Texas-based Magnum Hunter would end up owning about 46 or 47 percent of the new company, making the transaction with Cimarex a true merger of equals. Cimarex oil and gas reserves would nearly triple to 1.3 trillion cubic feet of natural gas equivalent and daily production would roughly double to around 500 million cubic feet of gas equivalent.

Cimarex spun off from Helmerich & Payne

“We truly are taking two very good companies and making something better,” Magnum Hunter’s Evans said. Magnum Hunter announced in October that it would be “seeking strategic alternatives” for the company, including a possible sale.

Largely a U.S. Mid-continent player before the merger, Cimarex would gain a much larger position in the Permian Basin of West Texas and southeastern New Mexico and gain entrance into the Gulf of Mexico.

“The Permian Basin was a huge reason for this deal,” Paul Korus, Cimarex’ chief financial officer, said, adding that about 44 percent of combined reserves would be in the Permian, while roughly 40 percent would be in the Mid-continent, nine percent on the Gulf Coast and about four percent in the Gulf of Mexico. Tom Jorden, Cimarex’ executive vice president of exploration, said the combined company would have about $600 million to spend on projects in 2005, with about half of the total going to the Mid-Continent and Permian Basin and about half earmarked for the Gulf Coast and Gulf of Mexico.

He said Cimarex was looking to achieve a balance between the “solid, moderate risk” areas of the Mid-continent and Permian Basin and the “higher risk, higher rates of return potential” of the Gulf Coast and Gulf of Mexico.

“We like the Gulf of Mexico onshore and offshore (and) we’re very excited by the challenges,” Jorden said. “But we’re also very wary of some of the operational risks, some the geological risks and we like to have that balance.”