Mikaila Adams
OGFJ Associate Editor
Merger will create one of the largest CO2 EOR platforms
Denbury Resources Inc. has entered a definitive merger agreement to buy Encore Acquisition Co. in a transaction valued at roughly $4.5 billion, including the assumption of debt and the value of the minority interest in Encore Energy Partners LP.
The deal will create one of North America's largest crude-oil focused, independent oil production and exploration companies. SMH Capital sees a “rosy future” in energy and believes this recent acquisition is the beginning of a coming boom in M&A activity.
The move should bump Denbury into the Top 20 in the OGJ150 rankings. Most recently, as shown in the November issue of Oil & Gas Financial Journal, Denbury came in at No. 28. Encore came in at No. 33.
Transaction highlights
The acquisition will also create one of the largest CO2 enhanced oil recovery (EOR) platforms diversified across the Gulf Coast and Rocky Mountain regions, complemented by ownership and control of the Jackson Dome CO2 source in Mississippi and CO2 sequestration contracts secured with anthropogenic sources in the Gulf Coast, Midwest and Rockies. According to Pritchard Capital Partners, the combined companies will have over 500 MMboe of additional potential barrels recoverable with CO2 tertiary operations.
Encore stockholders will receive $50 per share for each share of Encore common stock, comprised of $15 in cash and $35 in Denbury common stock subject to both an election feature and a collar mechanism on the stock portion of the consideration. The collar mechanism is limited to a 12% upward or downward movement in the Denbury share price. The terms represent a 35% premium to Friday’s (October 30) close.
Pritchard noted the “longer lead-time of CO2 project development in the Rockies is ideally matched with a strong growth profile from low-risk development of unconventional resource plays in the Bakken oil shale in North Dakota and the Haynesville shale in North Louisiana.” Encore has one of the larger acreage positions in the prolific Bakken oil shale with over 300,000 net acres.
“Encore is an excellent fit with Denbury’s CO2 EOR program,” said Phil Rykhoek, CEO of Denbury. “Encore has built an enviable asset portfolio in the Rockies, anchored by mature legacy crude oil assets, and our combined size and scale of operations will allow us to undertake significantly larger CO2 projects in the Gulf Coast and the Rockies. He expects the transaction to be “meaningfully” accretive to Denbury on a cash flow basis, between 8% and 18%.
About the combined companies, Jonny Brumley, CEO of Encore, stated, “The large reserve and production base will increase the operational and financial flexibility allowing for more efficient development of the assets of both of our companies.”
Transaction financing
Denbury intends to finance the transaction with a combination of equity and debt.
JP Morgan has underwritten a new $1.6 million bank revolving credit facility and a $1.25 billion bridge financing to subordinated debt facility. The new debt financing will be used to fund the cash portion of the consideration, potentially retire and replace $825 million of Encore’s outstanding subordinated notes, all of which have a change of control put option at 101%, replace Encore’s existing bank facility which has roughly $180 million currently drawn and outstanding, and to pay other fees and expenses.
To fund the equity portion of the merger, Denbury expects to issue between 115 million and 146 million shares of common stock.
Finally, during 2010, Denbury intends to sell non-core oil and gas properties of the combined companies to reduce its overall debt levels with targeted sales proceeds of at least $500 million. Denbury will own the general partner interest of Encore Energy Partners and roughly 21 million limited partner units. The company may decide to sell certain properties to Encore Energy Partners as a means to reduce the company’s debt. The new combined company will have a vast inventory of long-life oil fields that could be excellent candidates for asset drop-downs.
Upon approval, the transaction is expected to close in 1Q10, at which time, it is anticipated that Denbury stockholders will own between 63% and 68% of the combined company and Encore stockholders will own between 32% and 37%. The combined company will continue to be known as Denbury Resources Inc., will be headquartered in Plano, Texas, and Denbury’s board and senior management will remain unchanged.
JP Morgan Securities Inc. acted as exclusive financial advisor to Denbury and Barclay’s Capital Inc. acted as exclusive financial advisor to Encore. Baker & Hostetler LLP acted as legal counsel to Denbury and Baker Botts LLP as legal counsel to Encore.
Shares of Denbury Resources fell 8% today after Sunday’s announcement.