CHAPTER 3 FINANCING MERGERS AND ACQUISITIONS

• Jurisdiction: United States

Mergers and Acquisitions of Natural Resources Companies
(Nov 1994)
CHAPTER 3
FINANCING MERGERS AND ACQUISITIONS
Samuel D. Haas
Thompson & Knight
Dallas, Texas
Howard House
Lehman Brothers
New York, New York
R. Stribling Koster
Salomon Brothers
Chicago, Illinois
James E. Parkman
Petrie Parkman & Co.
Denver, Colorado

Panel Discussion

• E&P Asset Market Overview

• E&P Asset Market Outlook

• Trends / Situations to Monitor

PETRIE PARKMAN & Co.

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E&P Asset Market Overview

• Demand Exceeds the Supply of Quality Assets

• Independents Have Emerged as Main Acquirors of Properties

• Buyers Are Accepting Lower Acquisition Returns and Embracing Upside Potential

• Resurgence of Corporate Transactions

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Demand Exceeds the Supply of Quality Oil & Gas Assets

• The tremendous amount of equity raised by energy companies in 1992 and 1993 created many well-funded buyers

• Properties offered for sale, however, have failed to materialize in sufficient quantities to satisfy demand

• Specifically, the major oil companies have not been aggressive in selling properties

• The table below documents the slow pace of transactions seen so far in 1994:

1994 YTD	1993	1992
Over $500 MM	1	1	1
$100 MM to $500 MM	4	8	6
$50 MM to $100 MM	3	5	4
Less Than $50 MM	47	102	87
TOTAL	55	116	98

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Independents Have Emerged as Main Acquirors of Properties

• Many independents are well-capitalized after recent equity offerings

• The capital markets have generally rewarded strategic acquisitions

• Many of the asset acquirors from the 1980's are no longer buying

• Acquisition has become an accepted growth method as many companies find scaled-back exploration departments are unable to replace reserves

• Acquisitions can be deemed "strategic" by independents in terms of geographic focus, technical insights, risk management, and cost savings

• Another significant emerging class of buyers is the utility group

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Buyers Accepting Lower Acquisition Returns and...

• The industry perceives a general balance between supply and demand for natural gas

• The developing gas futures market is allowing buyers to "lock-in" prices for 12 to 18 months

• Lower interest rates in the U.S. and risk management through price hedging have combined to reduce the initial return requirements of purchasers (equity returns are enhanced by subsequent investments)

• Today's valuation parameters:

SHORT-TERM	LONG-TERM
Oil Prices	Soft	Flat to Moderate Escalation
Gas Prices	Can Lock-In "Futures Deck"	Ranges from Moderate to Aggressive Escalation
Abandonment/Salvage	More Conservative	Increasing Scrutiny
Discount Rate	15 — 20% Pre-Tax; 10 — 14% After-Tax; (Lower in Highly Competitive Situations)

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...Embracing Upside Potential

• A significant number of buyers generally compete for attractive acquisitions:

DATE	6/93	7/94	8/94
Companies Contacted	94	60	45
Companies Receiving Brochure	67	34	31
Companies Visiting Data Room	24	17	19
Companies Making Offers	15	9	15

• In this environment, buyers look for ways to distinguish themselves — often through assigning significant value to non-producing reserves

• Other potential upside such as operational improvements and cost savings are being considered and evaluated

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Resurgence of Corporate Transactions

• Factors contributing to a resurgence of E&P M&A activity:

> General improvement in liquidity/balance sheets over the past 2 years

> Significant increase in the number of independent oil & gas companies

> Growing frustration in attempting asset acquisitions

> Increasing ownership of oil and gas equities by large institutions and fund managers under pressure for continuous outperformance

> Opportunity to exploit relatively high stock price of potential acquiror

> Realization that substantial cost savings and operational synergies can be realized from consolidating mid-sized companies

> Readiness and willingness of the industry to act as a White Knight

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Resurgence of Corporate Transactions

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