Rainwater Has High Hopes For Mesa-Parker Marriage
The Wall Street Journal April 29, 1997 By CARLOS TEJADA and TERZAH EWING Staff Reporters of THE WALL STREET JOURNAL
Earlier this month, investor Richard Rainwater helped arrange the marriage of Mesa Inc. and Parker & Parsley Petroleum Co. Already, he's counting on the resulting company to be fruitful and multiply in size.
If shareholders approve the deal, the new company, to be called Pioneer Natural Resources Co., will be the nation's third-largest independent energy company in terms of reserves. But the aggressive Fort Worth, Texas, financier vows: "It won't remain the third-largest for long."
Before they concentrate on growing, however, the two companies have lots of work to do. They have to merge a natural-gas company that grew mostly by acquisitions with an oil company known for an aggressive drilling program, as well as combine two managements with different styles. In addition, the new team will need to whittle down a $1.3 billion debt burden, most of which Mesa accumulated during its years of corporate takeovers. "The legacy of Mesa is something that still must be overcome," says Greg McMichael, an energy analyst with Hanifen Imhoff Inc. in Denver.
Valuation of Shares
Both companies also need to win over shareholders, particularly those of Parker & Parsley, who some analysts think may be getting short shrift. Terms call for Parker shareholders to receive one share of Pioneer for each of the 35.2 million Parker shares outstanding, giving them a majority of the new company. Mesa shareholders will get one share in the new company for every seven Mesa shares they hold. Based on Mesa's closing price of $4.875 Monday, Parker's shares are valued at about $34.125. Mesa traded at $6 before the transaction was announced. Parker traded at about $29 a share.
But Michael R. Spohn, an analyst with Petroleum Research Group, an independent research firm, values Parker's net assets at $38 to $39 a share. Mesa "is getting the better deal," he says. A Parker spokesman said the deal valued the company's shares at about $40 a share based on Mesa's stock price on the trading day before the deal was announced.
Still, the deal allows either party to back out if Mesa's stock price remains below $5 in the days leading up to closing. Mesa, which Mr. Rainwater bailed out with a $133 million equity infusion last year, says it will begin selling the benefits of the deal to Wall Street before the summer deadline. "There's a lot of water to go under the bridge," a Mesa spokesman says.
The votes to approve the deal will be taken in July.
Plans to Cut Debt
The new company already is laying plans for trimming debt, increasing revenue and searching for new prey. And it's getting lots of encouragement from Mr. Rainwater, who will be the company's largest sareholder, with an 8.5% stake.
Mr. Rainwater recommended Jon Brumley, 58 years old, to be Mesa's chairman and chief executive officer in August, counting on Mr. Brumley's acquisition experience to rebuild a company that struggled for years under an onerous debt load. Parker's chairman and chief executive, Scott Sheffield, 44, was Mr. Rainwater's second choice for the Mesa job. The financier introduced the two, figuring Mr. Brumley's big-picture skills and Mr. Sheffield's eye for details and
operations expertise would be a good match.
With Mr. Brumley as chairman and Mr. Sheffield as Pioneer's CEO and president, the new Pioneer expects to try to sell $100 million to $200 million of assets, trimming debt to 40% of assets from 42%. The company also plans to increase production from existing properties by 15% a year to help reduce debt below $1 billion.
Mr. Sheffield already has some experience in that. After acquiring Australia's Bridge Oil Ltd. and its Gulf Coast reserves in 1994, Parker's debt ballooned to more than $700 million from about $350 million. But Mr. Sheffield was able to cut that amount nearly in half, primarily by selling Bridge's Australian assets, or about a third of the assets it had acquired.
Parker Survives Tax-Law Changes
Mr. Sheffield, who has spent nearly his entire career at Parker, also is an aggressive operator. The company grew by operating drilling partnerships sold to high-income investors as tax shelters.
But while many other such companies disappeared after tax-law changes, Parker survived because it was good at actually finding oil and natural gas. In recent years, Mr. Sheffield has converted it into a full-fledged exploration and production concern with 1996 revenue of $535.3 million and reserves of 302.2 million barrels equivalent of oil.
Mesa and Parker combined will have annual revenue of about $900 million and reserves of 1.9 trillion cubic feet of natural gas and 293 million barrels of oil, and they expect to hunt for more. The two companies are budgeting $300 million for development of existing properties and $100 million for exploration in 1997. Parker alone was planning to drill 700 new wells this year; in light of the merger, it now has more modest plans for 600 new wells. But by contrast, Mesa drilled about 36 wells last year, including those with partners.
Instead, Mesa for years prospected for reserves on Wall Street under founder and longtime Chairman Boone Pickens Jr., who led some of the most high-profile takeover efforts of the '80s. In fact, Mr. Sheffield was reluctant to consider a transaction until he was sure Mr. Pickens would be only an outside director.
With fresh capital, Mr. Brumley has Mesa acquiring again: Earlier this month, it bought Greenhill Petroleum Corp., a unit of WMC Ltd. of Australlia, for $267 million. Mr. Brumley says Pioneer will budget $50 million to $150 million for acquisitions, but said the number could change. He also said the company already is looking at potential acquisitions but declined to specify what they might be.
"Mesa has increased production through acquisitions and Parker & Parsley's production is coming from the drill bit. It will be an advantage merging the two," says Mr. Brumley.
Mr. Spohn of Petroleum Research says that with low energy prices and tamer stock prices, Pioneer could find bargains. Cabot Oil & Gas Corp. is a potential acquisition target, he says, along with larger companies such as Enserch Exploration Inc., Seagull Energy Corp. and Union Texas Petroleum Holdings Inc. "There's some cheap names out
there," he says. All four companies declined to comment about Pioneer.
Sorry for the delay in posting. Just got around to reading my own journal last nite. Hope you all had a great weeekend. |
