Crimson, Contango Announce Merger
Plan to merge in an all-stock transaction.
Crimson Exploration Inc. (Nasdaq: CXPO) and Contango Oil and Gas Co. (NYSE: MCF) plan to merge in an all-stock transaction valued at $390 million, including the assumption of $244 million in Crimson debt.
Upon closing, each Crimson shareholder will receive 0.08288 shares of Contango, an exchange that values Crimson shares at $3.19 based on Contango’s closing price of $38.50 on April 29. That valuation is an 11% premium to the five-day average of Crimson’s shares and a 5% premium to its price during the previous 90 days.
Crimson shareholders will own 20.3% of the combined company. The new Contango board will include eight members: five from Contango and three from Crimson. Under the agreement, Crimson will become a wholly owned subsidiary of Contango. The combined company will have an estimated enterprise value of about $1 billion at current share prices.
Joe Romano, the current chairman and chief executive and president of Contango, will be chairman of the new Contango; Allan Keel, Crimson’s current chief executive and president, will be the combined company’s president and chief executive. Joe Grady, Crimson’s current chief financial officer, will be the combined company’s chief financial officer and senior vice president.
The merger remains subject to the usual regulatory approvals and the approval of both Contango and Crimson shareholders. The transaction is expected to close sometime in the third quarter of 2013. Oaktree Capital Management, Contango’s largest shareholder, has already indicated it supported the merger, Romano said.
Romano said the company will have a greater scale, lower risk profile and better cost of capital after the merger. The current debt load will be refinanced at a lower rate, saving the company $15 million annually in interest payments, Grady said.
In addition, the merger will diversify Contango’s proved asset base, which is currently 90% in the Gulf of Mexico. After the merger, the company’s proved reserves base will be 60% in the Gulf of Mexico and 40% onshore.
The transaction will also increase Contango’s oil production and proved oil reserves and give the company more than 50% liquids upside potential. Proved reserves as of March 3 will increase 59% to 312 Bcfe, from the current level of 196 Bcfe. Contango’s production will increase from 65 MMcfe per day to 101 MMcfe per day after the two companies merge.
Romano said the merger will allow the combined companies to accelerate its planned drilling program in the Woodbine, Gulf of Mexico, Buda and James Lime. Total capital expenditures should reach about $130 million in 2013 and between $150 million and $200 million in 2014. The majority of that will be in the Woodbine, Keel said.
“Crimson has done a wonderful job of setting these properties up for a long-term future development, which we expect to undertake upon closing,” Romano said.
The merger goes back several months, when the two companies have had the opportunity to get to know each other, Romano said. “Over the past few months, Contango personnel have spent a great deal of time with the Crimson team. We like their reserves. We like their prospects and we like their people,” he said.
The merger also gives the combined company a critical mass to grow in the next few years. “Crimson is the right partner at the right time in our history,” Romano said.
The combined company will have a larger and more diversified footprint. Its operations will include Contango’s area of operations: Tuscaloosa Marine shale and diverse areas in shallow-water Gulf of Mexico. In addition, Crimson’s onshore asset base includes acreage in the Niobrara, Haynesville/James Lime, Woodbine and the Eagle Ford. Contango also has a minority interest in the Jonah Field in Wyoming and the Duvernay shale in Alberta.
“Through this merger, we will be creating a larger, more diverse company with improved growth characteristics and an enhanced exposure to a balanced offshore Gulf of Mexico and onshore Texas production profile,” Romano said.
Keel agreed that the companies make a good fit and set up the combined company for future growth. “Bill Romano and I have a shared vision of a combined company that grows by the drillbit while maintaining the financial flexibility to opportunistically consider accretive acquisitions,” Keel said.
The acquisition will enable Crimson and Contango to increase float, deleveraging balance sheet, and positioning the company to increase drilling activity, Grady said. Upon closing, the combined companies will reduce Crimson’s debt, retire its second-lien facility and expand the company’s revolving credit facility.
Crimson shares rose 4.5% after the announcement. Crimson is an oil and gas company based in Houston. Its proved reserves on Dec. 31 totaled 116 billion cubic feet equivalent, including 61.9 Bcf of natural gas and 9.2 million barrels of oil, condensate and liquids.
Contango’s share price slipped to $37.65 per share after the announcement was made. Contango is also based in Houston.