From today's news. I like the part about wounded buffaloes, Noble Affiliates, OEI and BR. I own 2 out of 3 wounded buffaloes!!
Devon's Nichols Looking for More After Buying Rival Santa Fe
By David Wells
Oklahoma City, Aug. 28 (Bloomberg) -- In each of the past 29 years, investment bankers have bought dinner for Larry Nichols to celebrate the completion of an acquisition.
Nichols, Devon Energy Corp.'s chief executive, doesn't see the meals as victory parties. He's spent about $7 billion buying oil companies and fields since founding Devon with his father in 1971, and he knows closing on a transaction is only the beginning.
``If you think you have been successful doing a merger or acquisition at that point, you are woefully mistaken,'' said Nichols. ``It's really like celebrating the game at halftime.''
Difficult as it can be to absorb another company's assets and employees, Devon's acquisitions have paid off for investors. The stock has risen more than 10-fold since the company went public in 1988. The shares have jumped 82 percent this year, outpacing the 61 percent rise in the Standard & Poor's Midcap Oil & Gas Index.
This week, the company expects to close its biggest acquisition yet, the $3 billion purchase of Santa Fe Snyder Corp., capping a spree that has more than tripled the company's oil and natural-gas reserves in less than two years.
True to form, Nichols says he's already looking for someone else to buy. Some analysts warn that another big purchase, if it comes before Santa Fe is fully digested, could be too much for even a company as skilled at acquisitions as Devon.
``They've grown so big, so fast that they need to prove they didn't step out of their normal mold,'' said David Khani, an analyst at Friedman, Billings, Ramsey & Co., who has a ``buy'' rating on Devon shares.
Acquisitions `a Business'
Nichols said the integration of Santa Fe is already far along, though much remains to be done, such as uniting operations at the companies' fields in Wyoming, the Gulf of Mexico and the Permian Basin of Texas and New Mexico. The company will continue to buy companies, and the practice won't slow Devon's growth, he insists.
Acquisitions are ``a business of ours,'' Nichols said. ``The companies that don't have success at it are those that do it sporadically.''
Devon isn't opposed to a big purchase, though smaller ones are more likely, Nichols said. They'll probably come in areas where Devon already operates, such as the Permian Basin, he said.
Using its line of credit, Devon could make an acquisition of more than $1 billion, spokesman Vince White said. A much larger purchase is possible if the Oklahoma City-based company taps debt and equity markets, he said.
`Wounded Buffaloes'
Potential targets include Noble Affiliates Inc., Ocean Energy Inc. and Burlington Resources Inc., said Fadel Gheit, an analyst at Fahnestock & Co. Their shares have surged this year along with oil prices, yet still trade below highs of two or three years ago.
``These companies are like wounded buffaloes,'' said Gheit, who expects Nichols to pounce within six months. ``They are easy prey.''
Noble, Ocean and Burlington spokesmen declined to comment on takeover speculation.
Devon should use its soaring stock to buy a company, rather than purchase fields for cash, Gheit said. Noble has a market value of $2.1 billion, while Ocean is valued at $2.5 billion and Burlington at $8.5 billion. Devon's market value is currently $5.2 billion.
Devon last year bought PennzEnergy Co., the oil-exploration arm of the former Pennzoil Corp., for $2.6 billion. It acquired Canada's Northstar Energy Corp. in December 1998 for about $775 million.
``This company has historically grown through acquisitions, and they've been good at it,'' said Richard Johnson, manager of Columbia Small Cap Fund and Columbia Special Fund, which owns more than 500,000 shares.
Going Public
Nichols and his father, John, founded Devon to develop oil and gas fields in New Mexico. The company went public in September 1988 to raise money to buy land in other regions.
Its shares have climbed more than eightfold since, as Devon snapped up PennzEnergy, Northstar, Hondo Oil & Gas Corp.'s U.S. oilfields, and other properties. Each time, Devon paid little or no premium, and the acquisitions quickly added to earnings.
``What Devon does best is buy companies, fold them into the mix and stay financially strong enough to do it again,'' Khani said.
Like its rivals, Devon merges to gain size, finance drilling projects and maintain the right balance between production of oil and the production of gas, while wringing out savings through job cuts, office closures and consolidation of drilling operations.
Devon expects the addition of Houston-based Santa Fe to boost earnings immediately. The company plans to slash costs by $30 million to $35 million a year, in part by cutting 200 of its 2,200 jobs in North America and closing Santa Fe's offices in Denver and Midland, Texas.
Santa Fe
Devon said it will have the fourth-largest reserves of oil and gas among U.S. producers that aren't also refiners, trailing Unocal Corp., Anadarko Petroleum Corp. and Burlington Resources.
Moody's Investors Service has said it may upgrade Devon's debt rating. The combined company will have about $900 million at its disposal for drilling wells.
``We will come out of this transaction financially stronger than when we went in,'' Nichols said.
Devon will add Santa Fe's 386 million barrels of oil and gas to its own 670 million barrels. About three-fourths of the total reserves are in North America, with most of the rest in Asia and Latin America. The reserves are 53 percent oil and 47 percent gas.
The international properties will join fields acquired in last August's purchase of PennzEnergy, Devon's first step outside of North America. In the U.S. and Canada, Devon has concentrated on producing gas, which will account for 58 percent of reserves.
Natural-gas prices have more than doubled this year on the New York Mercantile Exchange, and supplies are tight. Demand in the U.S. is rising, in part because more of the fuel is being burned to produce electricity. |
