The Exploration Company to Acquire Output Exploration

The Exploration Company (Nasdaq:TXCO) has entered into an agreement to acquire Output Exploration LLC, a privately held, Houston-based exploration and production firm, for $91.6 million in cash, subject to certain adjustments, and $4 million of TXCO common stock.

The transaction, the largest in TXCO's history, will double the Company's proved reserves and increase current oil and gas production by nearly two thirds. It includes:

  • Proved reserves of 40 billion cubic feet equivalent (Bcfe). TXCO estimates an additional 51 Bcfe probable and possible (2P/3P) reserves. (These are not presently classified as reserves under Securities and Exchange Commission definitions.)
  • A proved reserves purchase price of $2.39 per thousand cubic feet equivalent (mcfe), or $2.85/mcfe fully developed; and $1.05/mcfe for 3P reserves, or $1.78/mcfe fully developed.
  • Current net oil and gas production of approximately 8.4 million cubic feet equivalent per day (mmcfed), representing a 62 percent increase in TXCO's current daily oil and gas production.
  • Approximately 31,000 net leasehold acres, of which 24 percent is undeveloped.
  • Associated operating infrastructure.
  • An expanded senior credit facility to fully finance the transaction.

"This acquisition is an excellent opportunity for TXCO because it allows us to leverage our existing strengths," said Chairman, President and CEO James E. Sigmon. "It is a good fit because the core of the Output properties is in the East Texas Fort Trinidad Field, an area that is prospective for similar plays that we know very well in our Maverick Basin area, such as the Glen Rose, Buda, Austin Chalk and Eagleford/Woodbine formations. This will allow TXCO's technical and operations team to apply its knowledge of these formations to East Texas. In addition, the Output East Texas acreage position is situated in the prolific, down-dip Bossier play, which has the potential to develop as the play expands."

"Output also has been an innovator in employing advanced technology, such as 3-D seismic interpretation, to evaluate, acquire, explore and develop oil and gas properties - just as we do at TXCO," Sigmon added. "We welcome Output's employees to TXCO and greatly value their technical expertise. With the drilling prospects identified on the Output acreage, we gain the potential to speed TXCO's continuing growth in oil and gas production and reserves."

Strategic Rationale

TXCO gains:

  • Increased drilling opportunities both in the near term and long term.
  • Greater size and growth opportunities - doubles proved reserves and sharply increases daily oil and gas production.
  • Increases exposure to the natural gas market.

TXCO also gains complementary assets in two areas:

  • Output holds approximately 20,000 net acres in the onshore Gulf Coast region, centered on the Fort Trinidad Field in Houston and Madison Counties, TX. Much of the Output acreage is prospective for the Upper Glen Rose, Woodbine, Buda/Austin Chalk and Deep Bossier. Working interests vary from property to property with 63 percent of proved reserves, on average, effectively operated as Output proposes and drills some wells before turning them over to a partner to produce. The Gulf Coast region constitutes approximately 88 percent of proved reserves included in the overall transaction.
  • In the Midcontinent, Output holds approximately 11,000 net acres in 16 counties of western Oklahoma, centered on the Rush Springs Field in the Anadarko Basin, Grady County, OK. These include significant exploration opportunities in the Lower Morrow/Springer Bar play. The Midcontinent assets are non-operated and constitute approximately 12 percent of proved reserves and production. Working interests in the Midcontinent leases varies from 50 percent to less than 1 percent.
  • Output proved reserves at Oct. 1, 2006, were 62 percent natural gas.
                         Pro Forma Acquisition Statistics
                                               TXCO   Output  Pro Forma TXCO
      -------------------------------------- -------- ------- -------------- 
      Estimated current net
       production/mmcfed                        13.4     8.4           21.8
      -------------------------------------- -------- ------- --------------
      Oil production/bopd                      1,837     640          2,477
      -------------------------------------- -------- ------- --------------
      Gas production/mmcfd                       2.4     4.6            7.0
      -------------------------------------- -------- ------- --------------
      Net acres                              699,172  31,000        730,172
      -------------------------------------- -------- ------- --------------
      Undeveloped acres                      671,165   7,440        678,065
      -------------------------------------- -------- ------- --------------
      Proved reserves (Bcfe)(a)                   40      40             80
      -------------------------------------- -------- ------- --------------
      Effectively operated/%                      87      63             75
      -------------------------------------- -------- ------- --------------
      Proved developed reserves (Bcfe)          18.9    31.2           50.1
      -------------------------------------- -------- ------- --------------
      Reserves mcfe/share                       1.21       -           2.40
      -------------------------------------- -------- ------- --------------
      Reserve life (years)(a)                    8.2    13.0           10.1
      -------------------------------------- -------- ------- -------------- 
      (a)Based on preliminary internal estimates and current production

      Merger Agreement

      The acquisition price of $95.6 million includes $91.6 million in cash plus TXCO common shares valued at $4 million at signing. BMO Capital Markets has agreed to underwrite a new, four-year senior secured revolving credit facility and a new, five-year senior secured second-lien term loan facility to fully finance the acquisition. Bank of Montreal has agreed to act as administrative agent for the lenders under the new credit facilities.

      TXCO's historically low debt-to-asset ratio will rise to approximately 38 percent, attractive in comparison to its peer companies. The transaction is expected to close on or before April 2, 2007. The total price will include customary adjustments. The boards of directors of both companies have unanimously approved the agreement, which is subject to customary conditions and regulatory approvals. Output will be merged into a TXCO subsidiary. Output's properties in California's Sacramento Basin will be sold to another party before closing. BMO Capital Markets acted as financial advisor to TXCO.