H. Craig Clark, Forest's President and Chief Executive Officer, stated, "We are undertaking this spin-off to facilitate the business combination with Mariner, thereby providing our shareholders the benefits of owning two best-in-class E&P companies. Mariner will be a well-capitalized, Gulf of Mexico explorer with an excellent track record, strong cash flow attributes, and broad exposure to deep water, shelf and deep shelf opportunities. Forest will be a well-capitalized, long-lived onshore resource company with a significant exploitation inventory and a proven acquire and exploit track record in North America. The spin-off will permit each management team to more clearly focus its efforts on the activities and types of assets that have made them successful. We believe the value proposition to our shareholders is compelling, as this transaction and the continued execution of existing business plans by both companies will help unlock the intrinsic value of our shares."
Scott D. Josey, Mariner's Chairman and Chief Executive Officer, stated, "We are very excited about this transaction for several reasons. It will increase our scale in the Gulf of Mexico, provide a strong financial platform for our successful exploration efforts, and enlarge our stockholder base for greater liquidity. The transaction provides us the unique opportunity to more than double our asset base and to emerge as a leading player in the Gulf of Mexico, with the scale and financial strength to pursue shelf, deep shelf, and deepwater opportunities. We look forward to transitioning Forest's Gulf of Mexico assets from a historically maintenance mode to a growth mode. We welcome Forest's Gulf of Mexico employees to Mariner and look forward to working with them to achieve this goal. We believe the merger of these two high-quality asset bases and strong technical teams will provide the shareholders of both Mariner and Forest the opportunity to realize the upside potential inherent in the assets."
Under the terms of the transaction, Forest will incorporate a separate entity ("Spinco") and contribute all of its offshore Gulf of Mexico operations and certain derivative liabilities (with a market value of approximately $50 million at June 30, 2005) into Spinco. Forest will distribute to its shareholders all of the common stock of Spinco, which will then merge with a wholly-owned subsidiary of Mariner in a stock-for-stock transaction. As a result of the transaction, in addition to retaining all of their shares of Forest Oil common stock, Forest shareholders will receive approximately 0.8 shares of Mariner common stock for each Forest share owned as of the record date of the transaction. Forest shareholders will receive approximately 58 percent of the common stock of Mariner on a diluted basis. Spinco will borrow from a third party and pay to Forest $200 million of cash (subject to certain adjustments to reflect an economic effective date of July 1, 2005), which Forest will use to pay down debt. Mariner plans to apply to list its shares on the New York Stock Exchange.
The boards of directors of Forest and Mariner have each unanimously approved the transaction. The transaction is subject to regulatory approvals and other customary conditions, including stockholder approval and the consent of Forest's bondholders. Approval of the transaction by Forest's shareholders is not required.
Following the transaction, Mariner's board will consist of its five current directors plus two new directors to be mutually agreed by Forest and Mariner. Forest management and its board of directors will continue in their current positions with Forest. Mariner management will continue in their current positions with Mariner. It is anticipated that the transaction will be tax free to Forest and its shareholders.
Citigroup Corporate and Investment Banking and Credit Suisse First Boston LLC were financial advisers to Forest for this transaction. JP Morgan Securities, Inc. provided advisory services to Forest related to credit and liability management matters. Lehman Brothers Inc. acted as the financial adviser and provided a fairness opinion to Mariner for this transaction. Legal advisers included Vinson & Elkins LLP and Weil, Gotshal & Manges LLP for Forest and Baker Botts LLP for Mariner.
Forest identified no further significant damage to its properties. In addition, Forest has been able to restore an additional 45 MMcfe/d of production since Forest's press release dated August 30, 2005. Estimated production of 30 MMcfe/d remains shut-in is due primarily to damage to third-party pipeline and gas processing plants in Southeast Louisiana. The timetable for restoring full production is uncertain as it is dependent on repairs to transportation and processing facilities which are owned by others.
Approximately 74 MMcfe/d of approximately 83 MMcfe/d of Mariner's pre-Hurricane Katrina production has been restored. The hurricane had no effect on Mariner's operated platforms. Preliminary reports from operators of other facilities that handle Mariner production indicate varying degrees of damage to their facilities, the full extent of which may not be known for several weeks. Mariner expects most of its remaining shut-in production will recommence within the next two weeks.
Mariner has ongoing operations at several development projects, including Swordfish (Viosca Knoll 961,962,917), Pluto (Mississippi Canyon 674,718), Rigel (Mississippi Canyon 252,296), and Ochre (Mississippi Canyon 66). Mariner is not aware of any damage to its subsea facilities or flow lines at this time; however, preliminary reports from the operators of the host facilities associated with Pluto, Rigel, and Ochre indicate varying degrees of damage, which will result in delays in the start-up of these projects. Preliminary reports indicate the host facility to Mariner's Pluto project may not be fully functional for up to six months. At this time Mariner does not believe that the damage sustained by facilities associated with its producing fields and development projects will result in any permanent loss of reserves.
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