Patina will become a subsidiary of Noble Energy, and Patina shareholders will receive consideration comprised of approximately 60 percent Noble Energy common stock and 40 percent cash. Based on the closing prices of Noble Energy and Patina shares on December 15th, the implied acquisition price of $37.89 per share represents an 18.7 percent premium.
Charles D. Davidson, Chairman, President and CEO of Noble Energy, said, "Patina has an outstanding domestic, long-lived natural gas focused reserve base that will strongly complement Noble Energy's growing organic onshore, deepwater and international operations. This acquisition also provides Noble Energy with substantial upside in the form of a multi-year inventory of low-risk exploitation and development opportunities that complement our existing high-growth portfolio. Patina's assets are located in some of the most prolific natural gas producing basins in the Rocky Mountain and Mid-continent regions of the United States, where Noble Energy already has initiatives in place to expand operations prior to the transaction."
Thomas J. Edelman, Chairman and CEO of Patina, added, "We believe the sale of Patina to Noble Energy will provide our shareholders and employees enormously enhanced opportunities. By combining Patina's exceptional inventory of high return onshore development and exploitation projects with Noble Energy's strong portfolio of attractive exploration and development projects internationally and in the deepwater of the Gulf of Mexico, we instantly achieve a dramatic diversification of our asset base. In addition, we gain access to the financing opportunities implicit in Noble Energy's investment grade rating, while greatly expanding our exposure to high impact exploration projects. Most importantly, these benefits can be achieved without the risks and delays implicit in trying to initiate our own offshore and/or international exploration program. Finally, we have developed an extremely high regard for Chuck Davidson and have confidence he has the ability to further enhance the combined company. We believe that the combination of his technical and managerial staff with Patina's will produce a wonderful team. As the proposed transaction involves a cash election, shareholders who wish to fully participate in the upside of the combined enterprise can choose to receive Noble Energy stock subject to proration. Those wishing to realize the very substantial gains which every shareholder of Patina has enjoyed can elect to receive cash."
"The addition of Patina's assets, particularly in the Wattenberg field, when combined with our operations in the Bowdoin field in Montana, the Niobrara trend in eastern Colorado, the Wind River basin in Wyoming and Piceance basin in western Colorado will create a new core operating area for Noble Energy in the Rocky Mountains. Patina's rapidly growing Mid-continent assets will become a new core area for Noble Energy as well, providing a platform for long-term production growth. After focusing on international expansion for the past several years, we are now adding a large base of long-lived production and low-risk drilling opportunities to complement our high-growth programs," noted Davidson.
2005 Noble Energy Guidance:
In conjunction with the announcement of the transaction, Noble Energy is issuing guidance for 2005:
Noble Energy Pro Forma Production Growth 10% 10% -- 11% Production (MBoepd) 175 -- 180 LOE/BOE $3.70 -- $3.90 $3.50 -- $3.75 SG&A/BOE $1.45 -- $1.65 $1.15 -- $1.35 DD&A/BOE $7.00 -- $7.50 $8.25 -- $8.75 Exploration (Millions) $140 -- $160 $140 -- $165 Capital Spending (Millions) $735 $995 Effective Tax Rate 42% 40% Deferred Tax 20% -- 30% 25% -- 35%Hedging:
Noble Energy has executed hedges through 2008 covering volumes averaging approximately 7,000 Bopd and 80 MMcfpd of natural gas. Noble Energy plans to continue to execute hedges for production through 2008. The hedges are in the form of swaps and include an average NYMEX-equivalent natural gas price of $6.13 per thousand cubic feet (Mcf) and an average NYMEX-equivalent crude oil price of $38.58 per barrel. Patina plans to remove all of its existing natural gas and crude oil hedges in conjunction with the closing of this transaction.
Total consideration for the shares of Patina is fixed at approximately $1.1 billion in cash and approximately 27 million Noble Energy shares not including options and warrants exchanged in the transaction. Under the terms of the merger agreement, Patina shareholders will have the right to elect cash or Noble Energy common stock, subject to a proration if either cash or stock is oversubscribed. While the per share consideration was initially set in the merger agreement at $37.00 in cash or .6252 shares of Noble Energy common stock, the per share consideration is subject to adjustment upwards or downwards so that each Patina share receives consideration representing equal value. This adjustment will reflect 37.5126% of the difference between $59.18 and the price of Noble's shares during a specified period prior to closing. Based on the closing price of $61.54 per share of Noble Energy on December 15th, the adjusted price would be valued at $37.89 or .6157 shares of Noble Energy stock.
Chuck Davidson will remain as Noble Energy's Chairman, President and CEO. Following the completion of the acquisition, Tom Edelman, Patina's current Chairman and CEO will join Noble Energy's board of directors as will one other director from Patina's board of directors. Edelman will also serve in a special advisory capacity to aid in the integration of the two companies. Jay W. Decker, Patina's current President previously announced that he would be leaving the company.
As a result of this transaction, he has agreed to remain for a period of time as a consultant to Noble Energy to facilitate the transition. It is also expected that several of Patina's existing officers will be joining Noble Energy's leadership team to help lead the newly combined company. Patina's current office in Denver will be retained and will serve as a regional office for Noble Energy.
The acquisition is subject to the approval of the shareholders of Patina and Noble Energy. The boards of directors of both companies have approved the acquisition. The acquisition is subject to customary conditions, including approval of listing of the Noble Energy shares to be issued in the acquisition 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 acquisition is expected to be completed in March or April of 2005.
Noble Energy and Patina Overview:
The investment plan for Patina's assets in 2005 includes record activity levels in its core operating areas. Planned 2005 capital expenditures total $260 million, compared to expected 2004 capital expenditures of $230 million. The 2005 capital program for Patina includes nearly 1,100 projects (new wells, recompletions, refracs and trifracs), compared to 900 projects for 2004. The details of the 2005 Patina capital program are as follows:
The acquisition of Patina adds to Noble Energy's substantial onshore development and exploitation projects. Prior to the Patina acquisition, Noble Energy planned to drill approximately 345 onshore wells in 2005, an increase of 200 wells over 2004 reflecting several new projects. In the Niobrara trend, 235 infill wells are planned following several successful pilots at 40-acre spacing. In its recently acquired 6,500-acre land position in the Piceance basin in Colorado, Noble Energy plans to drill 32 wells. Noble Energy is also testing production on its 27,000-acre Wind River basin position in Wyoming. An additional 38 wells, primarily exploration and exploitation, are planned for the Gulf Coast region. Another 25 development wells are planned for the Bowdoin field. Eight to 10 wells are planned for the Siberia Ridge field in southwest Wyoming and five to seven wells are planned for the Caspiana field in east Texas.
With the international expansion nearly complete, international operations are beginning to generate substantial free cash flow. Over the past several years, Noble Energy has successfully invested in high-growth international projects. As a result, the contribution from international operations has increased significantly. Since 1999, international reserves have increased at an average annual rate of 23 percent, from 140 million barrels of oil equivalent (MMBoe) to 322 MMBoe at year-end 2003, while international production has increased nearly fourfold from approximately 12,000 Boepd in 1999 to approximately 45,000 Boepd by the third quarter 2004.
After several years of international expansion, combining Patina's reserves with Noble Energy's will help rebalance Noble Energy's proved reserves by increasing the mix of domestic proved reserves from 30 percent to 55 percent of Noble Energy's worldwide total. Adding Patina's reserves will also increase Noble Energy's proved reserves by approximately 55 percent. Patina's reserves are primarily long-lived domestic natural gas, thus continuing a trend of reduced reliance on production from the short-lived Gulf of Mexico shallow shelf.
At year-end 2003, Patina had 253 MMBoe of proved reserves, of which 68 percent were natural gas reserves primarily located in the Rocky Mountain and Mid-continent regions. Approximately 54 percent of Patina's proved reserves are located in the Wattenberg field in the Denver-Julesburg basin. The remaining proved reserves are located in the Mid-continent region (30 percent), the San Juan basin (nine percent) and the Central region (seven percent). Netherland Sewell, an independent third-party reserves consultant, audits approximately 90 percent of Patina's reserves. Patina currently estimates that its proved reserves will be approximately 263 MMBoe by year-end 2004. Patina has an additional 214 MMBoe of probable and possible resources located principally in the Wattenberg field and Mid-continent region.
Patina is currently producing 55,700 Boepd, with 2005 production expected to increase 12 percent over the 2004 average. Upon completion of the acquisition, Noble Energy's daily production is expected to increase by approximately 53 percent to 161,700 Boepd. Domestic production is expected to increase from 57 percent of total daily volumes during the third quarter 2004 (59,884 Boepd) to approximately 70 percent of total daily volumes. Approximately 60 percent of the combined company's daily production will be natural gas.
Over the past several years, Patina has grown proved reserves, production and cash flow at a high rate. Reserves have grown at a compounded annual rate of 34 percent, with a five-year average reserve replacement rate of 488 percent. Patina's compounded annual growth rates for production and cash flow from 1999 through 2003 have averaged 26 percent and 53 percent, respectively. Likewise, operating cash flow per BOE has increased from $8.64 in 1999 to $20.09 for the first nine months of 2004.
Of the $3.4 billion purchase price, Noble Energy expects to allocate $2.5 billion to the 263 MMBoe of proved reserves (estimated year-end 2004), or $9.51 per barrel of oil equivalent (BOE) and $0.9 billion to the 214 MMBoe of probable and possible resources.
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