Oil deal to create giant

0 Comments | Deseret News (Salt Lake City), Jun 24, 2006 | by Kristen Hays Associated Press

HOUSTON -- Anadarko Petroleum Corp. on Friday announced plans to acquire two smaller competitors in a $21.1 billion deal that will create the nation's largest independent exploration and production company.

Anadarko's plan to buy Kerr-McGee Corp. and Western Gas Resources Inc. in separate all-cash transactions is just the latest example of industrywide consolidation that reflects the large sums companies have at their disposal amid record profits, as well as the difficulty they face in getting bigger simply through more drilling.

Kerr-McGee's core properties are located in the deepwater Gulf of Mexico and onshore in Colorado and Utah. Western Gas Resources' assets are primarily in Wyoming.

Anadarko's operations extend from the deepwater Gulf of Mexico, up through the western U.S. and Canadian regions and onto the North Slope of Alaska. Anadarko also has major positions in North Africa, the Middle East and Indonesia, as well as exploration or production operations in several other countries.

Before asset sales, the combined companies would have more than $17 billion in annual revenue.

Anadarko will pay $16.4 billion in cash, or $70.50 per share, for Oklahoma City-based Kerr-McGee and assume $1.6 billion in debt.

That represents a 40 percent premium over Thursday's closing price of $50.30 on the New York Stock Exchange.

The Houston producer will pay $4.74 billion, or $61 per share, for Denver-based Western Gas Resources and assume $560 million in debt. That cash offer represents a 49 percent premium over the company's closing stock price of $40.91 on Thursday.

Shares of Western Gas and Kerr-McGee soared on Friday's news. Western Gas shares rose to $59.67, up $18.76, or 46 percent, while Kerr-McGee shares jumped $18.31, or 36 percent, to $68.61, while shares of Anadarko fell $3.49, or 7 percent, to $44.90.

Jim Hackett, Anadarko's chairman, president and CEO, said Friday that Anadarko aims to retain talented Kerr-McGee and Western Resources employees, but the combined company's headquarters will be in Texas and the new workforce will be streamlined.

Anadarko, which has 3,300 employees reported $7.1 billion in 2005 sales. Kerr-McGee, which has 3,800 workers, had 2005 revenue of $5.93 billion, and Western Gas Resources, with 800 workers, had $3.96 billion in 2005 sales.

Houston-based Anadarko's acquisitions will more than double its annual sales. They also will hike Anadarko's footprint in two burgeoning natural-gas drilling regions -- the deepwater Gulf of Mexico and the Rockies -- at a time when the continent's demand is on the rise and overall output is stagnating.

But with oil and natural-gas prices as high as they are, Anadarko paid a steep premium for both companies, and the company's shares fell 7 percent after announcing the deals.

With resource nationalization rising amid soaring energy prices, it has become more challenging to explore for oil in places such as Russia and Venezuela, leaving executives scrambling for other growth options. Their focus has turned increasingly toward natural gas, with a bias toward serving the U.S. market.

"The core assets being acquired strongly complement Anadarko's existing properties, providing the scale and focus needed to deliver more robust, predictable and efficient growth," Hackett said.

Hackett said Anadarko could shrink to No. 2 or No. 3 among independent producers through asset sales aimed at cutting deal- related debt over the next two years. Independents focus on oil and gas exploration and production as opposed to integrated oil majors that also feature refining and retail operations.

The deals anticipate raising $15 billion through asset sales and equity issuances up to two years after closing to reduce debt which, with cash on hand, will fund the acquisitions. Both deals, which are not contingent upon each other, are expected to close by the end of the third quarter this year.

Moody's Investors Service and Standard & Poor's Ratings Services each placed Anadarko on review for a possible credit downgrade upon Friday's news, noting concern for the increased debt and necessity of follow-through on planned asset sales and equity issuances to shrink it.

Hackett said Friday that executives will assess what assets to sell after the deals close.

Analysts said the hefty premiums show Hackett is betting that natural gas prices will remain higher than historical levels with robust demand for a fuel used to heat homes, produce electricity and manufacture all sorts of petrochemicals. Imports of liquefied natural gas are on the rise, but building the ships and terminals necessary to support this side of the business takes years and permitting has proven difficult.

RBC Capital Markets analyst Scott Hanold said Anadarko's purchases "look pricey" in the short term, but it may be the company's best long-term strategy.

To maintain their independence, Anadarko and its rivals must get bigger, he said.

"This is a way to protect themselves," Hanold said.

While natural gas prices are still high, they are significantly lower than they were last winter. That has caused the stock prices of independents to drop a bit, making them seem more affordable.