Privately held Chaparral Energy Inc., Oklahoma City, plans to acquire Edge Petroleum Corp., Houston, (NasdaqGS: EPEX) in an all-stock reverse merger for an undisclosed price.

Merrill Lynch Petrie Divestiture Advisors managing director Sylvia Barnes estimates the price to be approximately $510 million. Merrill Lynch was advisor to Edge and provided a fairness opinion.

Chaparral will pay 0.2511 share per Edge share and one share of 5.75% Series A preferred stock per Edge preferred share. Chaparral stockholders will own approximately 86% of the combined company. The stock of the combined company is expected to begin trading on the New York Stock Exchange as CPR once the transaction is closed.

Edge announced in December it would seek strategic alternatives.

At year-end 2007, Edge assets included an interest in 151,295 gross (59,483 net) acres in Texas focused in the Vicksburg, Queen City and Deep Frio trends; 2,011 gross (575 net) acres in southern Louisiana in Acadia, Calcasieu, Lafayette, St. Landry and Vermilion parishes; 25,706 gross (13,563 net) acres in the Mississippi Interior Salt Basin and 44,732 gross (38,340 net) undeveloped acres in the Floyd shale play; 658 gross and net acres in Michigan producing from the Trenton/Black River formation; 100,712 gross (20,942 net) acres in southeastern New Mexico producing from the Yeso, San Andres, Queen and Grayburg formations and deep gas in the Atoka and Morrow formations; and 5,661 gross (4,692 net) undeveloped acres in the Fayetteville shale play in south-central Arkansas.

Some 85% of Edge’s proved reserves at year-end 2007 were in Texas, 6% in Mississippi, 5% in New Mexico and 4% in south Louisiana, Michigan, Alabama and Arkansas.

At year-end 2007, net proved reserves were 163.5 billion cubic feet equivalent (89% gas and gas liquids; 77% developed). Chaparrel estimates proved reserves currently to be 140 billion. Production was 61 million cubic feet equivalent per day. The company held 333,000 gross acres (139,000 net). Current Edge production is approximately 47- to 49 million per day due to asset sales and reduced capex during the review process.

Chaparral focuses primarily on later-stage properties and using enhanced oil-recovery (EOR) techniques in the Midcontinent and the Permian Basin with other interests in East Texas, North Texas, the Gulf Coast and Rocky Mountains. Proved reserves at year-end 2007 were 987 billion cubic feet equivalent (65% proved developed; 60% oil; 72% operated). Average daily production was 111.3 million equivalent. The PV-10 value was approximately $2.7 billion.

Pro forma, the combined company will have proved reserves of 1.15 trillion cubic feet equivalent as of Dec. 31, 2007 (56 % oil, 67% proved developed). Proved reserves are 66% in the Midcontinent, 17% in the Gulf Coast, 10% in the Permian Basin and 7% in other onshore basins. Present value of the proved reserves discounted at PV-10 as of Dec. 31 was $3.3 billion.

Combined production based on first-quarter results is approximately 172 million cubic feet equivalent per day, which implies a reserve-to-production ratio of approximately 18.3 years. Pro forma debt will be $1.6 billion.

Chaparral chief executive, president and co-founder Mark Fischer, says, “This transaction represents a milestone in Chaparral's long and successful 20-year existence as a private company and we look forward to the opportunities available to us as a public entity. We are extremely excited about this transaction as it allows us to achieve two of our corporate strategic initiatives of increasing our production and cash flow and also accessing the public-equity markets.”

Fischer adds, “We believe that Edge's exploratory prospect inventory provides significant high-impact growth opportunities for us and strongly complements our existing large inventory of low-risk drilling and enhanced oil-recovery projects. The combined company will have a robust, yet predictable and efficient, growth strategy and the potential for significant value creation.”

Edge chairman, president and CEO John W. Elias says, “The combined company will have the stability of Chaparral's production profile and long reserve life with long-term growth potential from their exciting CO2 EOR program combined with our short-term growth potential through our established exploration program.”

Chaparrel is owned 42.5% by Fischer, 32% by Chesapeake Energy Corp., Oklahoma City, (NYSE: CHK) and by Atoma Energy, a group of private investors including Fischer’s brother.

Privately held investment firm Magnetar Capital through Post Oak Energy Capital, Houston, have provided a $150-million Series B convertible preferred investment that will pay a 6.5% annual cash dividend or, at Chaparral's discretion, an 8% payable-in-kind dividend. The proceeds will be used to reduce debt, fund the combined company's capital program and for general corporate purposes.

Chaparral has received a financing commitment for a new credit facility led by JP Morgan that will be used to refinance Chaparral's and Edge's existing credit facilities. The initial borrowing base will be either $825 million or $1 billion, based on the amount of additional hedges put in place. Availability at closing is expected to be approximately $375 million, based on a $1-billion borrowing base.

Fischer will continue as the chairman, chief executive and president. Joseph Evans will continue as chief financial officer, executive vice president and corporate treasurer. Robert Kelly will continue as senior vice president, general counsel and corporate secretary.

The company's headquarters will remain in Oklahoma City and the company will maintain a Gulf Coast presence using Edge's headquarters as a regional office in Houston. Following the transaction, Chaparral expects its board will consist of nine directors, including at least two independent members of Edge's board.

Closing is expected in the fourth quarter. The merger is expected to be tax-free for Edge stockholders.

SunTrust Robinson Humphrey and RBS Greenwich Capital are advisors to Chaparral. Merrill Lynch & Co. is advisor to Edge.

Standard & Poor's Ratings Services has placed Chaparral’s B credit rating on CreditWatch with positive implications and its senior unsecured debt on CreditWatch with developing implications. The rating is contingent on the final capital structure and asset value supporting the unsecured debt.

S&P analyst Paul Harvey says, “The positive CreditWatch on Chaparral's corporate credit rating reflects the expected improvement to the company's liquidity and financial profile due to the merger with Edge, as well as the sale of $150 million series B convertible preferred stock and a new credit facility with up to a $1-billion borrowing base.”

Pro forma debt to EBITDA would improve to around 3.5x, or about 4x if preferred equity is treated as debt, from 6x at Dec. 31, 2007. Further, Chaparral's production and cash flows should benefit from the more rapidly producing Edge properties, which will lower Chaparral's pro forma reserve life to around 18 years from 24. In addition, liquidity will benefit from debt repayment via the proceeds of the series B preferred stock as well as from the expanded borrowing base.