"Evergreen's long-lived natural gas reserves are a perfect fit with our vision to expand our premier asset foundation in North America to further anchor our growing exploration and international portfolio. We are harvesting a portion of the strong returns from our deepwater Gulf of Mexico exploration success to reinvest in enhancing our long-lived North America asset foundation and expanding our inventory of low-risk development drilling locations," stated Scott D. Sheffield, Pioneer's Chairman and CEO.
"We believe this merger provides an attractive opportunity to realize the value of our long-lived natural gas assets and provide exposure for our shareholders to high-impact exploration projects. Pioneer has also consistently demonstrated its ability to manage technology-intensive, statistical development projects. This merger is a great fit for our employees and shareholders. Pioneer's entree into the Rockies adds another quality operator that will pay particular attention to the environmentally-responsible operating techniques that this region demands, continuing Evergreen's unique business model and philosophy of doing it right. Our corporate cultures and attitudes toward value creation and community enrichment are extremely complementary," added Mark Sexton, Evergreen's Chairman and CEO.
Pioneer has had significant success with its model of using its long-lived foundation assets that generate superior free cash flow to invest in a balanced portfolio of opportunities. Pioneer's strategy of deploying a portion of free cash flow to high-impact, high-return exploration and acquisitions has paid off, allowing the Company to harvest a portion of the cash flow from its high-return success to invest in Evergreen's assets. These assets will expand Pioneer's long-lived foundation and add a new core area with a significant inventory of low-risk drilling opportunities to rebalance Pioneer's portfolio and provide additional free cash flow for future growth.
Evergreen is one of the leading developers of coal bed methane reserves in the United States. The addition of Evergreen's reserves will increase Pioneer's proved reserves by approximately one-third, essentially all North American natural gas. Evergreen's year-end proved reserves of approximately 1,495 billion cubic feet of natural gas equivalents ("Bcfe") are concentrated in two Rockies basins, Raton (94%) and Piceance/Uintah (4%), and in southern Canada (2%). Evergreen's proved reserves are audited by Netherland, Sewell & Associates, Inc., a third-party reserve engineering firm. The fields have extensive opportunities to extend proved reserves with an additional 890 Bcfe of identified probable reserves, the predominance of which are in its Rockies fields.
The acquisition cost for current proved reserves is estimated to be $1.40 per thousand cubic feet of natural gas equivalent ("Mcfe"). Full-cycle finding and development cost, including the acquisition cost and future development costs to convert proved undeveloped and probable reserves to proved developed producing reserves, is expected to be approximately $1.22 per Mcfe. The transaction adds over 2,000 low-risk onshore U.S. drilling locations and at least eight years of low-risk production growth.
Evergreen produced 127 million cubic feet of natural gas equivalent per day ("Mmcfepd") in 2003, is currently producing approximately 150 Mmcfepd and expects to average approximately 160 Mmcfepd during 2004. Production from Evergreen's assets is expected to double by 2008.
"Evergreen's focused strategy and quality long-lived properties in the Rockies will establish the ideal new core area for Pioneer, in line with our strategy of building a stable foundation with excess cash flow to invest in high-return opportunities. Assuming that the merger is completed at the end of the third quarter, we expect 2004 production to range from 70 to 73 million barrels of oil equivalent, with growth of 10% to 15% anticipated in 2005," stated Scott Sheffield.
Over the past five years, Evergreen has posted 36% compound average growth in production with five-year average reserve replacement of over 800%. Evergreen's five-year average finding and development cost is $0.49 per Mcfe. Evergreen has a large low-risk drilling inventory with less than 50% of the potential drilling locations in the Raton Basin having been developed and approximately 1,500 identified potential drilling locations. Evergreen's position in the Piceance and Uintah Basins adds additional potential, holding more than 350 identified potential drilling locations on approximately 220,000 net acres.
Evergreen's reserves-to-production ratio is one of the longest in the industry at approximately 32 years. Due to the long-lived nature of the proved reserves, the capital required to replace Evergreen's annual production is minimal, estimated at approximately 15% of their projected 2004 cash flow. With pipeline capacity to transport Rockies production to Mid-Continent gas markets, Evergreen has significantly enhanced its cash margins.
Evergreen's position in the Western Canadian Sedimentary Basin covers approximately 100,000 net acres. All of the production to date is from conventional and tight sand gas development, and Evergreen plans to drill wells during 2004 to test the area's coal bed methane potential.
In order to protect the economics of the merger, Evergreen has agreed to place new natural gas swaps totaling 75% of its estimated production through the end of 2005. The 2004 hedging program has been completed, and, to date, Evergreen has 25% of its 2005 production hedged at a NYMEX-equivalent price of approximately $5.62 per Mcf.
Pioneer has added gas swaps increasing total North American hedge volumes to approximately 25% of production at a NYMEX-equivalent price of $5.62 per Mcf. Additional hedges are expected to be implemented to achieve the Company's debt reduction targets.
Under the Agreement and Plan of Merger dated May 3, 2004, holders of 44 million shares of Evergreen common stock will have the right to receive an aggregate of 25 million shares of Pioneer common stock (with related stockholder rights) and a total of $850 million in cash. This represents a price per Evergreen share of $39.00 (based on Pioneer's last reported sale price on May 3, 2004, of $33.52 per share). Holders of Evergreen common stock will have the option to elect among three types of consideration for a share of Evergreen common stock: (1) 1.1635 shares of Pioneer common stock; (2) $39.00 cash; or (3) 0.58175 shares of Pioneer common stock and $19.50 in cash. Evergreen stockholders who do not make an election will receive 0.58175 shares of Pioneer common stock and $19.50 in cash per Evergreen share. All holders of unvested restricted stock under Evergreen's stock-based employee plans will be deemed to have elected to receive Pioneer common stock. Holders who elect all stock consideration or all cash consideration (other than holders of unvested restricted stock) will be subject to allocation of the stock and cash so that the aggregate amounts of stock and cash will be as set forth in the first sentence of this paragraph.
In addition, Evergreen will seek to sell its Kansas assets before the closing date of the merger. The merger agreement provides for an additional cash payment to Evergreen shareholders equal to the greater of: (1) $.35 per share (approximately $15 million) as consideration from Pioneer for the Kansas properties in the merger, or (2) the gross proceeds less transaction costs from the sale of the Kansas properties to a third party that closes before the closing date of the merger.
Pioneer anticipates exercising the accordion feature on its existing $700 million senior credit facility in order to increase the size of the facility to $1 billion. Pioneer has entered into an agreement pursuant to which JPMorgan Chase Bank will initially underwrite a $900 million, 364-day senior unsecured revolving credit facility for acquisition financing and to enhance liquidity.
Effective at the completion of the merger, two of Evergreen's directors -- Mark S. Sexton and Andrew D. Lundquist -- will join Pioneer's board of directors. Mr. Sexton will be a Class I director (term expiring at Pioneer's annual meeting of stockholders in 2007) and Mr. Lundquist will be a Class III director (term expiring at Pioneer's annual meeting of stockholders in 2006).
Concurrently with the signing of the merger agreement, Dennis R. Carlton and Kevin R. Collins each entered into a consulting and non-competition agreement with Pioneer which will be effective upon the closing of the merger. In addition, Mark S. Sexton entered into a non-competition agreement with Pioneer. The non-competition agreements for all three prohibit them from competing against Pioneer in the Raton Basin for a period of one year after the merger.
The merger is subject to approval at meetings of the stockholders of Evergreen and Pioneer. The merger was approved by the transaction committee and the board of directors of Evergreen and was approved by the board of directors of Pioneer (with all directors voting in favor, except Scott D. Sheffield, who did not participate and did not vote because he is a director of both Pioneer and Evergreen).
The merger is subject to customary conditions, including approval of listing of the Pioneer shares to be issued in the merger on the New York Stock Exchange and expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The merger agreement may also be terminated in certain circumstances, including if Evergreen receives and decides to accept an unsolicited, superior offer. The merger is expected to be completed in the second half of 2004.
J.P. Morgan Securities Inc. acted as financial advisor to Pioneer, and Citigroup Global Markets, Inc. acted as financial advisor to Evergreen in connection with the merger transaction.
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