Tom Brown antes up $268 million to diversify out of Rockies

Buys small Texas, New Mexico exploration and production company

Petroleum News Houston Staff

Natural gas producer Tom Brown is coughing up $268 million in cash to buy a small exploration and production company in Texas with attractive reserves and production far removed from its traditional stomping grounds in the U.S. and Canadian Rockies.

The Denver-based independent simply has been stung too often with the troublesome price differentials for natural gas and an inadequate transportation system that have plagued gas producers in the Rockies for years.

“Gas prices have been challenged with not enough pipeline capacity,” Jim Lightner, Tom Brown’s chief executive officer, said May 14 in a conference call after disclosing plans to acquire Dallas-based Matador Petroleum.

Lightner stressed that Tom Brown is not giving up on the Rockies. Rather, he explained, enhancing the company’s southern flank in Texas would help “diversify our portfolio” while “exposing shareholders to much better gas prices and high potential reservoirs.”

“Having all your eggs in one basket is not good for our shareholders,” Lightner asserted.

Matador’s assets are concentrated in the East Texas basin and Permian basin of west Texas and southeastern New Mexico. The company, which operates the majority of its properties, holds about 56,000 net developed acres and 111,000 net undeveloped acres.

“These properties have extensive development, exploitation and exploration opportunities,” Lightner said.

Reserves would grow to more than 1 tcf

The deal also would add natural gas production of 61,000 million cubic feet per day of equivalent to Tom Brown’s current output of about 224,000 million cubic feet per day of equivalent.

Under terms of the transaction, Matador shareholders would receive $17.53 per share and Tom Brown would assume about $105 million in Matador debt, bringing total value of the deal to $373 million.

The deal, expected to close by the end of June, is still subject to the approval by holders of two-thirds of Matador’s outstanding stock.

Tom Brown said it plans to barrow money initially to finance the Matador acquisition but would evaluate longer term alternatives in the capital markets, including the issuance of equity as well as placing debt in the private markets.

Matador reported 2002 net income of $13.9 million on total revenues of $59.9 million, compared to 2001 net income of $12.4 million on revenues of $63.9 million. Tom Brown lost $8.2 million in 2002 on revenues of $235.6 million, compared to 2001 net income of $69.5 million on revenues of $326.3 million.

Tom Brown, largely on the strength of commodity prices, got off to a good start in 2003. The company reported a first-quarter profit of $19.9 million or 49 cents per share versus a loss of $18.5 million or 47 cents per share for the same period last year.

However, compared to the year-ago period, production during the first quarter decreased 6 percent to 224,000 million cubic feet per day of gas equivalent. Production was affected by decreased drilling activity during the second half of 2002, due largely to low natural gas prices in the Rocky Mountain region and seasonal drilling restrictions, Tom Brown said.