XTO a probable acquisition candidate:
thestreet.com
Williams Snags Barrett in Shell Game
By Christopher Edmonds
Special to TheStreet.com
Originally posted at 3:21 PM ET 5/7/01 on RealMoney.com
As Williams (WMB:NYSE - news) sealed its bid for Barrett Resources (BRR:NYSE - news), it saw a way to add fuel to its growing power base. As for Barrett, it saw a big price tag and a way to beat the "shell" game.
On Monday, Williams agreed to purchase Barrett in a cash and stock deal valued at about $2.45 billion. The deal calls for Williams to purchase 50% of Barrett stock for $73 a share and then, in a two-step merger, purchase the remaining Barrett shares for 1.767 shares of Williams. Based on Williams' closing price on Friday, the parties said the average exchange price is $73.32 for each share of Barrett. Williams also agreed to assume $300 million of Barrett debt.
The price values Barrett's proven natural gas reserves at $1.34 per thousand cubic feet.
The merger agreement ends the battle for control of Barrett. Royal Dutch Shell (RD:NYSE ADR - news) originally offered $55 a share to purchase Barrett, a deal that was rejected. When Shell raised its bid to $60 a share, Barrett again rejected the offer, instead choosing to put itself up for auction. Shell chose not to participate in the auction, and launched a hostile tender for the company, seeking to replace members of the Barrett board. Shell indicated Monday morning it was ending its efforts to purchase Barrett.
Even if interested, Shell would have been hard-pressed to persuade Barrett to break the deal, which is subject to a termination fee of up to $90 million, including reimbursing Williams for expenses.
Gas ... at Any Price
Williams Chairman, President and CEO Keith Bailey said the Barrett acquisition presents opportunities that are compelling. "As I look back over the acquisitions we have made during the course of my career, I really have not thought of one that is a better fit from the standpoint of both the value that we will receive from the transaction, as well as what it does for our company from a strategic sense," he noted on a conference call discussing the deal.
Specifically, he noted that Barrett's proven reserves help Williams fill a gap between its need for natural gas to fire its growing fleet of power-generation plants and its inventory of gas assets. "It balances the risk profile of our rapidly growing power portfolio by enabling us to add significant additional new gas reserves, so that we have a natural hedge against the short position that is created as we add additional power-generation facilities," he said.
For many analysts, that explanation is compelling. "Williams can't afford to be unhedged," opines Raymond James energy analyst Wayne Andrews. "This is a physical hedge, and it comes at a much cheaper price than they would pay on the forward market to lock in those volumes."
Still, others believe that Williams paid a hefty premium for Barrett's assets. "There will be some synergies, but the $70-plus price tag is pretty rich," notes Dan Pickering, director of research at Simmons, a Houston energy investment firm and a member of the TSC Energy Roundtable. "Within the overall context of Williams this wouldn't change a positive opinion to a negative one, but it doesn't look to be a real positive data point for the stock. It's a rich deal."
The fact that Shell chose not to chase the price is likely to signal the deal is, at best, fully valued. Investor reaction confirms that notion. In midday trading, Williams was down $3.33, or nearly 8%, to $38.34.
Fueling Additional Acquisitions
Shell's offer for Barrett not only pushed the company to look for a friendly partner, it also fueled speculation regarding a new wave of merger and acquisition activity in the oil patch.
Now, that the deal is done -- and at a price many initially thought was unrealistic -- the speculation is red-hot. "This is a sign of things to come," says Doug Hohertz, portfolio manager at The Mitchell Group, an investment advisory firm specializing in energy, and also a member of the TSC Energy Roundtable. "The valuations of E&P [exploration and production] companies is very cheap. This deal really opened a lot of eyes, and probably will set a number of deals in motion that were brewing in the industry."
On the heels of Calpine's (CPN:NYSE - news) purchase of Canadian-based Encal, Williams' bid for Barrett confirms there is a new group of buyers for natural gas production assets: independent power producers. "Calpine and Williams have been the aggressive players," notes Simmons power analyst Jeff Dietert. "Dynegy (DYN:NYSE - news), Mirant (MIR:NYSE - news), NRG (NRG:NYSE - news) and Enron (ENE:NYSE - news) have said the gas markets are liquid enough that you can buy gas without owning the assets in the ground. But you are seeing generation portfolios growing so substantially that you now have examples of two companies that want to build their equity ownership."
That prolific growth in generation will likely push the independent power producers, or IPPs, to begin to more aggressively target natural gas assets for acquisitions. "If you are a utility or developing a lot of IPP capabilities, you are going to be looking at the pure gas plays," says Hohertz.
In our initial take at Shell's first offer for Barrett, we looked at many of the companies that might be in play if the acquisition business heated up. All of those companies remain on investors' list of exploration and production companies to watch.
However, a number of names universally surfaced as I talked to analysts and investors about the deal Monday morning. They include Ocean Energy (OEI:NYSE - news), Tom Brown (TMBR:Nasdaq - news), Pioneer (PXD:NYSE - news) and Chieftain International (CID:Amex - news). In March, Chieftain hired CIBC World Markets to explore a possible sale.
Other names to watch include Cross Timbers Oil (XTO:NYSE - news), Forest Oil (FST:NYSE - news), Louis Dreyfus Natural Gas (LD:NYSE - news), Mitchell Energy (MND:NYSE - news) and Newfield Exploration (NFX:NYSE - news).
A final place to watch is north of the border. Raymond James' Andrews believes companies like Alberta Energy (AOG:NYSE - news) and Talisman (TLM:NYSE - news) have also been growing their natural gas assets in the past year and, while getting larger, may catch the eye of acquirers. "These are solid companies with solid, producing assets," he says. "They have been growing through acquisitions [but] they could ultimately be targets as well."
While focusing only on the buyers and sellers can be a fool's game, Williams' willingness to pay up for Barrett appears to be a sign of things to come. "As people become more comfortable with higher gas prices and the values in the E&P sector, you will see companies begin to take advantage of that," says Hohertz. "Whether it is from the generators looking to acquire gas [assets] or E&P companies simply looking to get bigger, we are going to see more deals coming down the pike."
He adds, "It will be a very interesting time."
It already is. |
