Terms of the merger agreement provide that Magnum Hunter shareholders will receive 0.415 shares of Cimarex common stock for each share of Magnum Hunter common stock owned. Based on the closing price of Cimarex common stock on January 25, 2005, the acquisition of Magnum Hunter's stock would be valued at approximately $1.5 billion. Including the assumption by Cimarex of Magnum Hunter's debt, which at December 31, 2004 totaled $645 million, the total transaction value is approximately $2.1 billion.
In addition to the merger consideration and prior to closing, Magnum Hunter plans to distribute a special dividend representing its 29.3% percent ownership interest in TEL Offshore Trust (Nasdaq: TELOZ). The current market value of the trust units that Magnum Hunter owns is approximately $15 million, which would equate to a dividend value of $0.17 per Magnum Hunter share.
F.H. Merelli, Chairman and CEO of Cimarex, said, "We saw in Magnum Hunter the clear opportunity to expand in our existing core areas and to add new projects, all without jeopardizing our strong financial position. Their properties provide a substantial footprint in the Permian Basin from which we can grow, measured exposure to high potential projects in the Gulf of Mexico, and a nice overlap in some of our other areas of operations. The merger structure allows Cimarex to greatly expand its balanced-risk drilling program underpinned by a strong balance sheet. This is all about continuing to build a better company."
Jerry Box, Chairman of Magnum Hunter said, "On October 7, 2004, the Board and management of Magnum Hunter embarked on a review of strategic alternatives in order to enhance and maximize shareholder value. This transaction represents the culmination of those efforts."
Gary C. Evans, President, Chief Executive Officer and founder of Magnum Hunter, responded, &Based on the respective closing prices of Cimarex and Magnum Hunter on January 25, 2005, the proposed terms of the transaction imply a purchase price of $16.67 per Magnum Hunter share or a premium of 26%. With the additional contemplated distribution of TEL Offshore Trust units to our shareholders, the overall consideration implies a price of $16.84 per share. The combination of these two very successful enterprises will be complemented with a highly skilled employee group, enhanced financial strength, and growth opportunities to further build shareholder value into the future."
As of October 1, 2004, Magnum Hunter's internally estimated total proved reserves were approximately 1.0 Tcfe (61 percent natural gas and 72 percent proved developed). Those estimates were prepared using Securities and Exchange Commission (SEC) guidelines using then current prices and cost estimates together with the company's current drilling and development plan for proved non-producing and undeveloped locations. Updated year-end 2004 proved reserve estimates prepared by Magnum Hunter's independent petroleum engineering consultants incorporating management's current development plans and year-end 2004 pricing will be reported during March 2005 in conjunction with the filing of its annual report on Form 10-K. Magnum Hunter also intends to announce its fourth-quarter and full-year 2004 financial and operating results during March 2005.
Cimarex estimates that its year-end 2004 proved reserves totaled 449 Bcfe (81 percent gas and 99 percent proved developed). Cimarex plans to report its fourth-quarter and full-year 2004 financial and operating results on February 16, 2005.
Impact on Cimarex:
-- Triples proved reserves, doubles production and extends reserve life
-- Establishes the Permian Basin as a substantial core area
-- Adds highly complementary oparations in the Mid-Continent and Gulf Coast areas
-- Adds high potential opportunities in the Gulf of Mexico (water depths less than 600 feet)
-- Leverages Cimarex's financial position while maintaining a strong balance sheet
-- Enhances operational expertise by adding Magnum Hunter's technical teams and retaining a base of operations in the Dallas/Ft. Worth area
-- Expected to be meaningfully accretive to per share reserves, production and cash flow
Combined Company Pro Forma Statistics:
-- Year-end 2004 proved reserves of over 1.3 Tcfe of which 68 percent is gas and 83 percent is proved developed ***
-- Pro forma combined fourth-quarter 2004 estimated net daily production of approximately 480 MMcfe/d, of which approximately 23 percent was hedged
-- Pro forma combined full-year 2005 estimated net daily production of approximately 500 MMcfe per day, of which approximately 18 percent is currently subject to hedging agreements
-- Reserve life index of 7.7 years based on Cimarex's estimate of combined year-end 2004 proved reserves and fourth quarter 2004 production
-- Stable production and low-to-moderate risk drilling programs in the Permian Basin and Mid-Continent regions, where the combined number of identified future drilling locations approximates 925
-- Complementary, measured exposure to higher potential drilling projects in the Gulf Coast and Gulf of Mexico
-- Strong balance sheet with a pro forma debt-to-total capitalization ratio of approximately 25 percent
-- Over $600 million of pro forma combined estimated exploration and development expenditures in 2005
*** During the due diligence process conducted in connection with Magnum Hunter's review of strategic alternatives, Cimarex has formulated a preliminary drilling and development plan for Magnum Hunter's properties. Based on that plan and at the time of this announcement, Cimarex anticipates categorizing as total proved reserves approximately 900 Bcfe, of which 75 percent would be considered proved developed.
Merger Agreement and Other Information:
Under the terms of the proposed agreement, Magnum Hunter shareholders will receive 0.415 shares of Cimarex common stock for each share of Magnum Hunter common stock that they own. The merger is expected to be non-taxable to the shareholders of both companies. In addition to the merger consideration and prior to closing, Magnum Hunter will distribute its ownership interest in TEL Offshore Trust to its common stockholders as a special dividend.
As a result of the merger transaction and based on the 87.1 million Magnum Hunter common shares currently outstanding, Cimarex expects to issue approximately 36.1 million common shares to Magnum Hunter's common stockholders. On that basis, it is anticipated that after closing, the combined company would have approximately 78 million basic shares outstanding and that Cimarex shareholders would own 53.6 percent and Magnum Hunter shareholders 46.4 percent.
Magnum Hunter also has approximately 7.2 million transferable common stock purchase warrants outstanding that expire March 21, 2005 and entitle the holders to purchase directly from Magnum Hunter one share of common stock for each warrant at a price of $15.00 per share.
The merger agreement contains provisions for Magnum Hunter to cancel immediately before closing the majority of its outstanding stock options in exchange for lump sum cash payments equal to the difference between the closing price of Magnum Hunter shares one day prior to closing and the exercise price per share for such options. Et December 31, 2004, Magnum Hunter had approximately 6.0 million options outstanding at an average exercise price approximating $8.00 per share.
The merger agreement is subject to favorable votes by the shareholders of Cimarex and Magnum Hunter, customary regulatory approvals and certain closing conditions. Upon completion of the transaction, one existing board member from Magnum Hunter will join the Cimarex board of directors. The merger transaction is expected to be completed during the second quarter of this year.
Petrie Parkman & Co. was financial advisor and Holme Roberts & Owen LLP was legal counsel to Cimarex. Lehman Brothers has provided a fairness opinion to Cimarex in connection with the proposed merger.
Deutsche Bank Securities, Inc. and Merrill Lynch & Co. were financial advisors and provided fairness opinions to Magnum Hunter. Thompson & Knight LLP was legal counsel to Magnum Hunter.
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