Statoil ASA, Stavanger, Norway, (NYSE: STO) plans to acquire all of Norsk Hydro ASA, Oslo, (NYSE, Oslo: NHY) except for its aluminum business, in an all-stock deal worth some US$30.6 billion. The new company will become the world's largest offshore producer, and both have multiple interests in the Gulf of Mexico.

The offer is 0.8622 Statoil share per Hydro share. The country of Norway will hold some 62.5% in the merged entity, which will be headquartered in Stavanger and have assets in approximately 40 countries, including integrated production, refining and marketing, plus interests in renewable energy and carbon capture.

Combined production is 1.9 million BOE per day and proved reserves are 6.3 billion BOE. Norsk Hydro will continue as a global aluminum and solar company.

Its president and chief executive, Eivind Reiten, says, "The merger ensures long-term value creation for shareholders, continued development of competence and innovation and a further strengthening of Norway's role as a globally leading energy supplier."

Statoil president and CEO Helge Lund says, "The time is right for one strong Norwegian-based energy champion. We are creating a stronger and more competitive company. Combining the best of both organizations, we will significantly improve our competitive position internationally and promote long-term vitality of the Norwegian continental shelf."

Reiten is to become chairman of the new company and Lund is to be president and CEO. The deal is expected to close in the third quarter of 2007.

Bernard Picchi, an analyst with Wall Street Access, says few analysts were surprised by the merger news. "Statoil will buy Hydro's energy assets for about $28 billion. That translates into a purchase price of about $14 per bbl. for Hydro's proved reserves of 2 billion BOE, and about $50,000 per BOE of (daily) production. Both measures are on the low end of recent North American energy mega-mergers...Since the Norwegian government owns most of the voting shares of both companies, investors should expect no other offers for Hydro."

Upon the news, Hydro shares rose about 20%; Statoil shares fell 2%.

Picchi says, "Combined, Hydro and Statoil will be the world's largest producer of oil and gas from offshore fields. This is a mark of distinction that will help the company bid for additional offshore exploration and development rights in areas like West Africa, Russia's Barents Sea, and the deepwater Gulf of Mexico."

Standard & Poor's Ratings Services placed Statoil on CreditWatch with positive implications and Norsk Hydro on watch with negative implications.

"The CreditWatch status on Statoil reflects the possibility of a one-notch upgrade to factor in additional, extraordinary support from the Kingdom of Norway for the newly merged oil and gas company, which will have a unique role in Norway's strategic hydrocarbon sector and represents a long-term investment for the state," says S&P credit analyst Karl Nietvelt.

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