The Cimarex Energy Co. (NYSE: XEC) deal for Magnum Hunter Resources Inc. (NYSE: MHR) made for stunned talk the opening morning of NAPE 2005, which was attended by more than 10,000 people. Market expectations were that Denver-based Forest Oil Corp. (NYSE: FST) would win its bid for the diversified onshore/offshore U.S. player, but Cimarex finished No. 1 for Irving, Texas-based Magnum after pushing Forest out of the running. The deal is surprising for several reasons. • Cimarex is half the size of Magnum in terms of proved reserves, while Forest's reserves are nearly as much as Magnum's. • Also, the deal will change onshore-focused and lightly leveraged Cimarex's profile significantly. Cimarex has a small amount of debt; with Magnum, it will gain more than $600 million of debt. Cimarex's new debt-to-total-capitalization profile will still be a peer-group low of 25%. • And, Cimarex is involved in relatively lower-risk plays than Magnum's Gulf of Mexico assets. Market reaction was mixed. One Houston-based energy investor was not convinced of the deal's merits. The decline Jan. 26 in Cimarex's stock price took out 0.7% of his total portfolio, he says. Shares of Cimarex fell from a preannouncement close of $40.18 to $36.06 at the end of announcement day. They rebounded some the following day to $36.43. Meanwhile, shares of Magnum moved from a preannouncement close of $13.24 to $14.85 at the end of announcement day. They further improved to close at $14.95 the following day. The improvement was likely due to the improved price for Cimarex shares. In the all-stock, merger-structured deal, Cimarex will pay 0.415 share per Magnum share, meaning a pre-announcement deal value of $1.5 billion for Magnum's stock. Adding in Magnum's debt, which is some $645 million, the total deal value is approximately $2.1 billion. The premium is 26%. And Magnum's stock price had already reflected some market enthusiasm. The combined company's proved reserves will total some 1.3 trillion cu. ft. equivalent (68% gas, 83% proved developed). Magnum has roughly 900 billion (61% gas, 72% proved developed) and Cimarex has some 400 billion (81% gas, 99% proved developed). Combined fourth-quarter net daily production was some 480 million cu. ft. equivalent, 23% hedged, and 2005 combined net production is expected to be 500 million per day, 18% hedged. The reserve-life index will be 7.7 years. Cimarex will have an inventory of 925 drilling targets in the Permian and Midcontinent, and some $600 million of capex to fund this. Merrill Lynch's E&P analyst John Herrlin says the deal represents a purchase price of $2.33 per thousand cu. ft. equivalent of proved reserves and that the recent E&P transaction average is $1.39 per thousand. "Small-cap E&Ps in our coverage universe are trading at $2.35 per Mcfe for proven reserves. On a flowing-barrel basis, Magnum is being bought for $49,606 versus Cimarex's multiple of $36,960 and the small-cap trading group average of $34,286." Herrlin had a Neutral rating on Cimarex shares "because we felt the company was inventory- and acreage-short. An E&P needs net acreage or prospect visibility, which we felt the company lacked. Clearly, some good field developments in the Midcontinent gave it good growth during a time of high natural gas prices and no debt." While he says he "always thought the company had done a good job," it was trading at 12.8 times price-to-earnings and had a price-to-discretionary-cash-flow-per-share multiple of 5.2 for 2005. He says the average small-cap E&P in his coverage universe had a P/E of 12.0 times and P/DCFPS of 3.9. Cimarex will keep an office in the Dallas-Fort Worth area, joining those it has in Denver and Tulsa. Operations will be combined in the Permian Basin, Midcontinent and on the Gulf Coast, and Cimarex gets exposure in the Gulf of Mexico. Cimarex was formed in 2002 from the combination of Key Production Inc. and its $211-million purchase of the E&P business unit of drilling company Helmerich & Payne Inc. (NYSE: HP). Magnum's last big corporate deal was the $1.2-billion acquisition of Prize Energy Corp. in 2002. The deal with Cimarex may close during the second quarter. Petrie Parkman & Co. was financial advisor to Cimarex. Lehman Brothers provided a fairness opinion. Deutsche Bank Securities Inc. and Merrill Lynch & Co. were financial advisors and provided fairness opinions to Magnum. F.H. Merelli, Cimarex chairman and chief executive, says, "We saw in Magnum Hunter the clear opportunity to expand in our existing core areas and to add new projects, all without jeopardizing our strong financial position...This is all about continuing to build a better company." -Nissa Darbonne

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