In May of 2008,
Encore Acquisition (NYSE: EAC) hung up the
"for sale" sign--the oil & gas company has finally
found its exit.
The $50 per share merger consideration offered by
Denbury Resources (NYSE: DNR) -- which
Encore's Board has embraced -- is roughly 25% below where
Encore was trading back then. Of course, oil was also
hovering around $130 at the time. This still looks like an
acceptable outcome for Encore shareholders. As long as they
built their stake in the company outside of the energy
sector's
manic phase, they've done pretty well.
From the perspective of Denbury shareholders, though, I'm
not crazy about this deal. On the surface, there is some
synergy between these two E&P companies. Both have
focused on applying enhanced oil recovery techniques to boost
production from old, tired fields. Denbury will build out its
opportunity set with this purchase. But is this really the
time or the place to be making such a move?
It seems like only yesterday that Denbury, preoccupied
with liquidity issues, was
digging in its heels. Just over a year ago, the company
shelved its $600 million acquisition of the Conroe field, cut
its capital expenditures, and largely hedged its 2009
production. These were smart steps that the market initially
ignored, as Denbury shares were marked down to the single
digits in November.
In the same vein, Denbury's
Barnett Shale fire saleseems like only a minute ago. In
May of this year, the company was deleveraging right
alongside
Delta Petroleum (Nasdaq: DPTR) and
Brigham Exploration (Nasdaq: BEXP). The firm
let go of those assets for a song. Now it's buying new ones
at fair, but not fantastic, prices. Yes, they are largely
oil-focused, unlike the Barnett assets that were sold for $1
per metric cubic foot (Mcf). But unlike the
brilliant purchaseof
Citigroup 's (NYSE: C) Phibro trading
operation by
Occidental Petroleum (NYSE: OXY), this deal
just doesn't look all that opportunistic.
In addition to a nice position in the
Bakken, Encore brings some Rockies-based enhanced oil
recovery projects to the table. Denbury's self-identified
"significant strategic advantage" is its control of a major
CO2 deposit and pipeline infrastructure in the Gulf Coast
region. These new properties do not play to that
strength.
Rather than strategic advantage, the dominant thought
processes here appear to be of the "bigger is better"
variety. Denbury management points to the deal's
accretiveness to cash flow per share, and the likelihood of a
lower cost of capital over time. These things may come to
pass, but Denbury is also diluting its focus (or enhancing
diversification, if you prefer the company line) and saddling
itself with fresh debt that could pose challenges.
While I don't expect a repeat of the situation faced by
Precision Drilling Trust (NYSE: PDS)
following its takeover of Grey Wolf, I also can't rule out
the possibility of the credit markets having another spasm.
It just seems odd for Denbury to regain an appetite for
financial risk so soon after its recent scare.
This article was originally published as
Does 1+1 Equal 3 in the Oil Patch?on
Fool.com
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