Anadarko Petroleum Corp., Houston, is acquiring Kerr-McGee Corp. in Oklahoma City and Western Gas Resources Inc. (WGR), Denver, in separate cash transactions totaling $21.1 billion, plus assumption of $2.2 billion debt.
The combined company will be the largest US-based independent producer, with “industry-leading positions in the deepwater Gulf of Mexico and the Rockies, two of the fastest-growing oil and natural gas producing regions in North America,” said Jim Hackett, Anadarko’s chairman, president, and chief executive. The two acquisitions will expand Anadarko’s deepwater holdings and create a leading producer in the Rocky Mountains.
“This is the first time in our memory that an E&P company has acquired two independents at the same time, and it underlines our thesis that companies with strong balance sheets and cash flows will take this opportune moment to acquire at attractive prices,” said analysts in the Houston office of Raymond James & Associates Inc. The acquisition “will support Anadarko’s endeavors and success in unconventional play development,” they said.
Robert S. Morris, Banc of America Securities LLC, New York, said, “These transactions are extremely positive for the E&P sector, as they highlight the ability of both independent and integrated companies, with strong balance sheets, to take advantage of what we believe are cheap valuations for the E&P group, on average, compared with New York Mercantile Exchange futures strip prices for both crude oil and natural gas.”
He noted, “Anadarko plans to hedge 75% of the projected production for both Kerr-McGee and WGR through late 2008 with a series of three-way collars to enhance the transaction economics and still provide upside exposure to any increase in commodity prices.”
Hackett emphasized that the skilled personnel of the two acquired companies were as attractive as the firms’ assets. Although there will be some overlap, he said he hopes to retain as many of those employees as possible.
“Kerr-McGee’s outstanding deepwater holdings and skill sets will elevate Anadarko into the top echelon of deepwater operators. Similarly, Kerr-McGee’s long-lived natural gas resource plays in Colorado and Utah, along with WGR’s in Wyoming, will combine with Anadarko’s assets to make us one of the largest producers in several of the most prolific basins in the Rockies,” Hackett said.
The WGR acquisition is valued at $4.3 billion, including $560 million in debt. WGR stockholders will receive $61/share in cash. That company will be merged into an Anadarko subsidiary.
Kerr-McGee is to be acquired for $16.4 billion, plus assumption of $1.6 billion in debt. Its shareholders are to get $70.50/share in cash. The deal is expected to close by the end of the third quarter, pending the usual approval by stockholders and regulators.
Anadarko is financing the acquisitions through a $24 billion short-term loan through UBS AG, Credit Suisse Group, and Citigroup Inc. It plans to raise an estimated $15 billion to reduce debt over the next 18-24 months through asset sales, cash from operations, and issuance of equity.
“We also expect cost reductions as we consolidate certain administrative functions, but the biggest synergies are expected to come from combining the complementary assets of the three companies and the skills of our employees. In today’s tight labor markets, gaining qualified people is a bigger focus than achieving cost savings through consolidation,” Hackett said.
On a full-cycle basis including acquisition and future development costs, Anadarko expects ultimately to recover 3.8 billion bbl of oil equivalent from the acquired properties at a cost less than $12/bbl. “Opportunities to gain access to such large, high-margin resource opportunities at such economic full-cycle costs are rare,” said company officials.
Kerr-McGee
In January, W&T Offshore Inc. agreed to buy all of Kerr-McGee’s interests in oil and natural gas properties on the Gulf of Mexico’s Outer Continental Shelf for $1.34 billion cash, in what was described as the final step in the company’s plans to divest its lower-growth, shorter-lived properties. That move made Kerr-McGee a takeover target, said some industry analysts.
However, Hackett said it put Kerr-McGee in a better position to move ahead, as happened in 2004 when Anadarko “went through the same exercise.”
At the end of 2005, Kerr-McGee’s proved reserves, excluding pending divestiture of properties on the gulf shelf, totaled 898 million bbl of oil equivalent, with natural gas accounting for 62%. Anadarko anticipates recovering ultimately more than 3.1 billion boe from the Kerr McGee properties at a cost of $39.2 billion.
Kerr-McGee’s core properties include 504 deepwater blocks in the gulf with 10 producing fields (of which it operates 3) and 8 discoveries (3 operated) in varying stages of development, and 4 prospects to be drilled this year. Those properties are supported by Kerr-McGee’s extensive “hub-and-spoke” infrastructure, “which offers highly cost-effective future development potential,” said an Anadarko statement.
Kerr-McGee holds 451,000 net acres in the Wattenberg natural gas play in Colorado, located largely on the old Union Pacific Railroad land grant where Anadarko owns the royalty interest. The company also has 237,000 net acres in the Uinta basin’s prolific Greater Natural Buttes gas play in Utah.
Kerr-McGee also is involved in exploration and development off China and Brazil and on Alaska’s North Slope and is exploring off Australia, West Africa, and Trinidad and Tobago.
Western Gas Resources
At the end of 2005, WGR’s proved reserves totaled 153 million boe, with proved undeveloped reserves accounting for 57% of that. Anadarko expects to recover 705 million boe from those properties at a full-cycle cost of $6.7 billion, including acquisition costs. The company said production from those properties this year should total 12.5 million boe.
Midstream gathering, processing, and transportation assets account for $1.6 billion of the acquisition price for WGR. The remaining value is assigned to two natural gas resource plays in Wyoming, including coalbed methane in the Powder River basin and tight gas in Pinedale field. The company’s Powder River coalbed methane properties are adjacent to Anadarko’s holdings in that area and are estimated to hold 9 tcf of gas in place.
WGR has 10% average working interest in the Pinedale-Jonah gas fields joint venture with more than 40 tcf of gas in place. Combining Anadarko’s and WGR’s properties will accelerate development of those resources, Anadarko said.
The agreement for the acquisition of WGR includes a right to match competing offers and a breakup fee of $154 million under certain circumstances. The Kerr-McGee agreement includes the same right to match competing offers and a breakup fee of $493 million.
