At press time, Anadarko Petroleum Corp. issued industry-roiling news: it plans to acquire not only Kerr-McGee Corp. but Western Gas Resources Inc. as well. The nearly 2,000-word press release is worth $23.3 billion-or some $11.6 million per word. As it came across the Internet, Anadarko's market cap was losing that much per minute. The stock cleanly tumbled from about $48.50 before the news to $45.25 a few hours later. Anadarko's loss immediately became other North American producers' gain, as the news put all independents into play. For example, Devon Energy Corp. shares jumped from $54 to $56.25; Southwestern Energy Co.'s improved from $27 to $30.25. Thank you, Anadarko, these shareholders sang. "We are creating a combined company with industry-leading positions in the deepwater Gulf of Mexico and the Rockies, two of the fastest-growing oil and natural gas producing regions in North America," says Jim Hackett, Anadarko chairman, president and chief executive. The plan is a departure from a few years ago when Hackett assumed the helm in late 2003 from former Anadarko chief executive John Seitz and chairman Bob Allison. Whispers at industry meetings were that Hackett would prep Anadarko for sale. He had already been successful at this at Ocean Energy and Seagull Energy where he was chairman, president and CEO. Hackett merged Seagull with Ocean, and then Ocean with Devon. He went to Devon briefly, and then left for Anadarko. Already, in the summer of 2003, prior to Hackett's arrival, business-development directors were reportedly in Anadarko's offices, perusing the company's assets, but they declined to bid sufficiently. Some 400 employees were let go, and several senior executives resigned or retired. But Hackett's latest plan is to expand Anadarko, not sell it, plus the two deals clearly take it out of play, nevertheless-$24 billion of new debt is hard to bite into when various analysts are forecasting that natural gas prices will tank this fall. Is that exactly the point, though? Interestingly, these deals take some other players-vocal hedge-fund managers-out of the game. As it signed the sale agreement, Kerr-McGee was saying sayonara to Carl Icahn of Icahn Partners LP, who pressured the company into portfolio and balance-sheet revisions last year. And, Western Gas Resources was saying au revoir to Daniel Loeb of ThirdPoint LLC, who pressured that board and management on improving returns last year. The Houston Exploration Co. would like to get rid of Barry Rosenstein of Jana Partners LLC. Is it too late for it to join in, and make the Anadarko purchase a trifecta? As for deal economics, John Herrlin, E&P analyst for Merrill Lynch, says, "Anadarko is aggressively consolidating and, thus, making a longer-term gas call while reducing some of its higher-risk project issues...Our primary concern is that Anadarko may need to book a lot of goodwill or put a fair amount of purchase costs in 'unamortized' properties in order to avoid dilution. "Given the call on gas, and that Anadarko indicated it would finance the transaction through a one-year $24-billion revolver, with pending asset sales and cash flow from operations, and an equity offering in order to pay it down, we think there remains some significant financial and operating execution risks." Those divestments are additional good news for other producers. Hackett says, "All three companies have certain assets that we will likely deem to be noncore once combined." He adds that much of Kerr-McGee and Western Gas Resources' production will be hedged at current market prices. From Kerr-McGee, Anadarko will gain some 900 million barrels of oil equivalent (BOE) of proved reserves (62% gas and mainly in the deepwater Gulf and in Colorado and Utah) for $18 billion, or about $20 per BOE or $3.33 per thousand cubic feet equivalent. From Western Gas Resources, Anadarko will gain some 153 million BOE of proved reserves (nearly 100% gas and primarily in the Rockies) for $5.3 billion. Roughly $1.6 billion of the deal value is for Western's midstream assets. The balance, $3.7 billion, is $24.18 per proved BOE or $4.03 per proved thousand cubic feet equivalent. In contrast, the average price paid in first-quarter 2006 for proved Rockies reserves was $1.42 per thousand cubic feet equivalent, according to asset-divestment advisory firm Scotia Waterous; for proved Gulf of Mexico reserves, it was $2.95.

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