Magnum Hunter Resources Inc. (Amex: MHR) and Prize Energy Corp. (Amex: PRZ) will combine to form an independent with an enterprise value of approximately $1.2 billion. The increased size should allow executives to take better advantage of acquisition opportunities and gain more attention from capital markets. "We all recognize that the next 12 months will be rocky," says Magnum Hunter chairman and president Gary C. Evans. "When opportunities come about, we want to be in financial shape to take advantage of them." The combined company, which would retain Magnum Hunter's name and Irving, Texas, headquarters, had total proved reserves of approximately 1 trillion cu. ft. of gas equivalent at Dec. 31, 2000. For the nine months ending Sept. 30, 2001, it had net daily production of 232 million cu. ft. of gas equivalent. Reserves are long-lived, with a more than 12-year reserve-to-production ratio, and are 55% gas. Financially, it will have a debt-to-capitalization ratio of less than 60%. The companies' executives also emphasize that Magnum Hunter and Prize have substantial adjacent property in their core Permian Basin, Midcontinent and onshore Gulf Coast operating areas. The combined company also will have an ongoing exploration program in the shallow-water Gulf of Mexico. Evans says the merged producers could divest $50- to $100 million of properties as they seek to drill only areas that offer the highest rates of return. Under the agreement, Prize shareholders would receive $24 per common share, payable in 2.5 shares of Magnum Hunter per share of Prize Energy, plus cash that would make up any difference. If Magnum Hunter's average stock price exceeds $9.50 for 20 days prior to closing, the company has the right to terminate the deal. In return, Prize can terminate it if Magnum Hunter's market price falls below $7.50 per share. The day the deal was announced, Magnum Hunter's stock closed at $7.79, down from $8.30 the previous day. Prize's stock closed at $22.57, up from $18.10 the day before. Private-equity investor Natural Gas Partners owns more than 50% of Prize, which was formed in 1999 with assets from Pioneer Natural Resources (NYSE: PXD). After the merger, Prize shareholders will own approximately 49% of the combined company. Evans will remain chairman, president and chief executive officer, and Magnum Hunter's executive staff members will continue in their current capacities. The size of Magnum Hunter's board will remain the same; however, two Prize independent board members will replace two existing independent directors of Magnum Hunter. Standard & Poor's Corp. placed its ratings of Magnum Hunter on watch, with positive implications. "The transaction significantly increases Magnum Hunter's scale in its core onshore properties," S&P said. "Although the cash component of the acquisition price will be determined near the close of the transaction, the combined company's financial leverage is expected to decrease from Magnum Hunter's current level." Evans says that its small size has always been Magnum Hunter's biggest weakness with the credit-rating services. He plans to visit them in January, and expects the assessments to be upgraded. -Jodi Wetuski

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