Filed by Noble Energy, Inc.
Pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule 14a-12 of
the Securities Exchange Act of 1934
Subject Company: Patina Oil & Gas Corporation
Commission File No. 001-14344
This filing relates to the proposed merger between Noble Energy, Inc.
("Noble") and Patina Oil & Gas Corporation ("Patina") pursuant to the terms of
an Agreement and Plan of Merger, dated as of December 15, 2004, by and among
Noble, Patina, and Noble Energy Production, Inc. (the "Merger Agreement").
Noble has filed the Merger Agreement with the U.S. Securities and Exchange
Commission (the "SEC") as Exhibit 2.1 to the Current Report on Form 8-K filed
by Noble on December 16, 2004, which report is incorporated by reference into
this filing.
Forward Looking Statements
The following transcript of the investor conference call conducted by
Noble and Patina on December 16, 2004 contains statements that constitute
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Any statements contained in the transcript that
are not statements of historical fact may be deemed to be forward-looking
statements. Words such as "believes," "anticipates," "plans," "predicts,"
"expects," "envisions," "hopes," "estimates," "intends," "will," "continue,"
"may," "potential," "should," "confident," "could" and similar expressions are
intended to identify forward-looking statements. These statements are based on
Noble's and Patina's current expectations and beliefs and are subject to a
number of risks, uncertainties and assumptions that could cause actual results
to differ materially from those described in the forward-looking statements.
Risks, uncertainties and assumptions include 1) the possibility that the
companies may be unable to obtain stockholder or regulatory approvals required
for the acquisition; 2) the possibility that problems may arise in successfully
integrating the businesses of the two companies; 3) the possibility that the
acquisition may involve unexpected costs; 4) the possibility that the combined
company may be unable to achieve cost-cutting synergies; 5) the possibility
that the businesses may suffer as a result of uncertainty surrounding the
acquisition; 6) the possibility that the industry may be subject to future
regulatory or legislative actions; 7) the volatility in commodity prices for
oil and gas; 8) the presence or recoverability of estimated reserves; 9) the
ability to replace reserves; 10) environmental risks; 11) drilling and
operating risks; 12) exploration and development risks; 13) competition; and
14) the ability of management to execute its plans to meet its goals and other
risks that are described in SEC reports filed by Noble and Patina. Because
forward-looking statements involve risks and uncertainties, actual results and
events may differ materially from the results and events currently expected by
Noble and Patina. Noble and Patina assume no obligation and expressly disclaim
any duty to update the information contained herein except as required by law.
Where to Find Additional Information about the Transaction
In connection with the proposed acquisition, Noble and Patina plan to file
relevant materials with the SEC, including one or more registration
statement(s) that contain a prospectus and a joint proxy statement (the "Joint
Proxy Statement/Prospectus"). INVESTORS AND SECURITY HOLDERS ARE URGED TO READ
THE REGISTRATION STATEMENT AND THE JOINT PROXY STATEMENT/PROSPECTUS CAREFULLY
(IF AND WHEN THEY BECOME AVAILABLE) AND ANY OTHER RELEVANT DOCUMENTS FILED WITH
THE SEC, AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO THOSE DOCUMENTS, BECAUSE
THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT NOBLE, PATINA, THE TRANSACTION
AND RELATED MATTERS.
Investors and security holders will be able to obtain free copies of these
documents through the website maintained by the SEC at http://www.sec.gov. In
addition, the documents filed with the SEC by Noble may be obtained free of
charge from the Investor Relations section of Noble's website at
www.nobleenergyinc.com. The documents filed with the SEC by Patina may be
obtained free of charge from Patina's website at www.patinaoil.com. Investors
and security holders are urged to read the Joint Proxy Statement/Prospectus and
the other relevant materials when they become available before making any
voting or investment decision with respect to the proposed acquisition.
In addition to the Registration Statement and the Joint Proxy
Statement/Prospectus, Noble files annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information filed by Noble at the SEC public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference room.
Noble's filings with the SEC are also available to the public from commercial
document retrieval services and at the website maintained by the SEC at
http://www.sec.gov.
Interests of Certain Persons in the Transaction
Noble, Patina and their respective executive officers and directors may be
deemed to be participants in the solicitation of proxies from the stockholders
of Noble and Patina in favor of the acquisition. Information about the
executive officers and directors of Noble and their ownership of Noble common
stock is set forth in the proxy statement for Noble's 2004 Annual Meeting of
Stockholders, which was filed with the SEC in March 2004. Information about the
executive officers and directors of Patina and their ownership of Patina common
stock is set forth in the proxy statement for Patina's 2004 Annual Meeting of
Stockholders, which was filed with the SEC in April 2004. Investors and
security holders may obtain more detailed information regarding the direct and
indirect interests of Noble, Patina and their respective executive officers and
directors in the acquisition by reading the Joint Proxy Statement/Prospectus
regarding the acquisition if and when it becomes available.
Transcript of the Conference Call
On December 16, 2004, Noble and Patina hosted a joint investor conference
call that was simultaneously webcast to discuss the merger of Noble and Patina.
The transcript of the conference call is attached hereto.
NOBLE ENERGY INC.
CONFERENCE CALL FOR DECEMBER 16, 2004 @ 10:00 A.M. EST
CHAIRPERSON: CHUCK DAVIDSON
EMAIL TRANSCRIPTION TO: jpippenger@nobleenergyinc.com
--------------------------------------------------------------------------------
Operator:
Welcome to the Noble Energy conference call. As a reminder, this call is being
recorded. I would now like to turn the call over to Chuck Davidson, Chairman,
President and CEO.
Chuck Davidson:
Good morning, everybody. This is Chuck Davidson and I'd like to welcome you to
our conference call. Thank you for joining us on such short notice. With me on
the call this morning is Tom Edelman, Chairman and CEO of Patina Oil and Gas
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Corporation, and of course what this call is all about is the two companies
just announced this morning that we have entered into a merger agreement, and
I'll be going through the transaction. Both of us will be talking about the
benefits to our shareholders. We'll be talking about what we see as the real
opportunities, and what I think is just a tremendous combination of two
companies going forward.
With me on this end also is Dave Stover, our Senior Vice President of Domestic
Operations and Business Development, and James McElvany, our CFO. We do have,
ah...this is a slide presentation. I hope that either you pull these down from
the Web or you're looking at the webcast on the Internet, and as we go through
that I would just remind everyone that we will be making some forward-looking
statements and certainly you should be referring to both the Noble Energy as
well as Patina's Websites in terms of greater detail on forward-looking
statements and to refer to our various filings on that.
Just in talking about the transaction, again we've announced an acquisition
with an overall transaction value of about $3.4 billion, and as you break that
out it's made up of about $1.8 billion of equity, $1.1 billion of new debt and
$500 million of assumed debt. And it's important to note in this that of that
assumed debt about a little over $300 million is the current net debt of
Patina Oil and Gas. And there will be another just under $200 million of
additional debt incurred just prior to closing due to the anticipated
termination of the existing Patina hedges on their production. 60% stock, 40%
cash is the consideration. Excluding options and warrants we would expect that
Noble will be issuing approximately 27 million shares.
As we go forward on this transaction, we see this as immediately accretive to
earnings per share, discretionary cash flow per share. It's, I think, overall
got not only some excellent financial metrics but great strategic benefits for
both companies as well. At the end of the day, the pro forma ownership is
roughly 68% Noble, 32% Patina. There are five current directors on Noble's
board and of course joining us will be Tom and one other director from Patina.
And just looking at the key terms and conditions, as you look forward this is
again a cash and stock transaction. The Patina shareholders can, subject to
proration, elect either cash or Noble stock. In either case in looking at it,
the cash equivalent per share is $14.80 plus the value of 0.3751 shares of
Noble stock, and again valued during a specified period just prior to closing.
Again, it will be approximately 60% Noble stock and 40% cash.
We would estimate the closing to be in the March/April timeframe of next year,
and of course it's subject to approvals of the Noble and Patina shareholders
as well as normal regulatory approvals. And there is a termination fee on this
agreement of $100 million.
I wanted to speak a little bit about how we saw the transaction, and I've
asked Tom to look at it as well for the Patina shareholders. From our
perspective we see this as a very important transaction for Noble Energy, one
that really fills a niche that we have been looking to fill for some time.
Overall, it increases our reserves and production by over 50%. It clearly
increases our domestic reserve life, and as you can see, our reserves per
share increased by some 12%.
More importantly, it introduces new core areas in some very important basins,
especially gas basins here in the U.S., in the Rockies as well as
Mid-continent. I think also, when we look at what Noble has been doing
recently and especially as we've been expanding and adding opportunities in
the Rockies, we see that Patina's excellent expertise and in tight gas
reservoirs will help us enhance our assets as well.
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Also, with the high-return Patina projects that are predominantly exploitation
and development projects, it reduces our risk and reduces our reliance so much
for growth here in the U.S. on exploration and provides a more balanced
investment portfolio going forward for the U.S.
I think another thing that really was attractive to us, and very exciting, was
the multi-year project inventory. We'll talk about it a little bit later, but
seven or eight years of projects identified now that really give this some
tremendous running room in the areas that we're talking about. Again,
immediately accretive by our estimates on earnings per share and discretionary
cash flow increases the free cash flow capacity. And that comes from both
companies. And importantly we have already and will continue to implement, a
hedging program that will protect these cash flows.
I think at this point I'd like to turn it over to Tom, and he can add his
perspective on this transaction.
Tom Edelman:
Thank you Chuck, and good morning ladies and gentlemen. We're obviously
delighted to ally ourselves with Chuck and with Noble Energy. As you know,
we've had phenomenal growth at Patina over the last eight years, increasing
the value of this asset base by sixteen-fold in the last roughly eight and a
half years, and our feeling has been at our management and board level that as
we approach $5 billion in size that we were going to need to contemplate, as
any good domestic independent would, moving offshore as well as
internationally. And that is a daunting prospect to do from scratch.
By doing this transaction, we not only received an attractive price and a
potential for liquidity for our shareholders, but we've allied ourselves with
someone with an unusually strong, in our view, international and offshore
portfolio. So we're very excited about the affiliation and what we think Chuck
and his management team, along with our management to the extent of our
expertise, as Chuck mentioned, in the onshore basins can do going forward.
In terms of looking at the company, we think that the market and the risk
profile of the company will take great benefit from having the majority of the
reserves in the domestic arena to balance, really, the phenomenal growth and
success Chuck and his guys have had bringing on stream these very impressive
international projects, and going forward to continue to build on that
strength domestically both from the Patina asset base and from the base of the
Noble assets that had already been built up prior to this transaction. But we
think we can bring with our expertise substantial additional value.
We gain the exposure and yet we have the opportunity for the liquidity. Our
shareholders can choose, whether they believe as I do and our management and
board does, that this has enormous potential, to stay with it or to use the
liquidity in the transaction to take what in every shareholders' case has been
a very attractive profit. And finally, as we continue to grow this entity, and
I look forward along with one of our directors, Jeffrey Berenson, to joining
Chuck and his board working with him in that capacity long term, that the
financial flexibility of Noble's investment grade rating opens up in this kind
of market substantial additional opportunities for growth going forward. So
we're very, very enthusiastic. And at this point, Chuck, I'll turn it back to
you.
Chuck Davidson:
Thank you, Tom. And really getting to Tom's point, I think, as we look at this
next slide and you look at the combined company and the assets that it has not
only U.S. but worldwide, we really think this now with this very important
addition with Patina really brings an outstanding combination of a very
diverse asset base globally.
4
As Tom and I began to consider this, and this was not something that was done
quickly or without thought by any means, we started our discussions back in
July and certainly they started from a strategy standpoint and I think went
exactly along the lines that Tom just outlined to you as the benefits we saw
of a larger, stronger company with a good diverse set of assets. And you can
see that it's a very nice domestic position not only in the Gulf of Mexico,
primarily growing in the deep water with our recent announced successes, but
now an extremely strong position domestic onshore. And as you've heard in the
past from Noble, we've had tremendous success in the international arena with
our projects in Ecuador, China, Equatorial Guinea and Israel, as well as
production at North Sea and opportunities in all these areas including
Argentina.
But getting more to this particular transaction, the chart here shows that
Patina really adds some very significant assets in the key growth basins. And
as Tom pointed out, assets that have a real track record and an organization
that really has a track record of not only growing those assets but generating
high-return projects going forward. And I think as we talk about these
projects, I think you get a sense as to what a great inventory, depth of
inventory, these assets bring.
The map just shows the key focus areas. Again, this is primarily in the
Rockies and Mid-continent. Of course, the very strong, very strong Wattenberg
position, in the D-J basin, but also a very strong Mid-continent position
that's growing rapidly as well, complemented by positions in the San Juan and
the Central areas. And again, we'll have more on that as we go through a
little bit.
But then when you look at how it all adds up, and then you add in what Noble
has been recently doing in some of these areas, it really rounds out to a very
nice domestic position. And in this case we've primarily highlighted areas
that we have been building in the onshore area of the U.S. including in the
Rockies in the Bowdoin Field. We recently announced we were going with a
200-well drilling program, in the Niobrara that's actually very close by to
the D-J Basin. Wind River, which is our Iron Horse project, which we're seeing
some good results. And I would say that all of these can employ some of the
great technology that Patina has been developing in their assets. So it's a
great complement to the portfolio. I think even more to the point, we have
just recently added to our position some substantial acreage in the Piceance
Basin, have already begun a drilling program there, and once again I think
that's one that will benefit from Patina's expertise.
As was noted in the release, we do intend to retain Patina's Denver office.
And clearly that will continue as a regional office to really manage some very
significant assets as we see here in the Rockies and Mid-continent areas.
Just quickly looking at how the reserves are rebalanced, we can see that we've
gone from a company which has indeed had a remarkable growth and success in
international where the year-end last year, our international reserves were
approximately 70% of the company, but it now rebalances very nicely. And as
you look at the end after the conclusion of this transaction we'll once again
be almost even, in fact a little bit more domestic than international on a
reserve basis.
And as we look also at how the production unfolds, again we see that it
strengthens the domestic onshore, particularly in these longer-lived basins in
the Mid-continent and Rockies. It continues our trend of reducing the reliance
that we have in our portfolio on the Gulf of Mexico shelf. And I just remind
many of you that just a few years ago almost 70% of Noble's production came
from the Gulf of Mexico and that was almost entirely the Gulf of Mexico shelf.
Following this transaction, again on kind of a current pro forma basis, that
would be down to some 24%. And I think the good news there is of that 24% what
we see is a growing component in the deepwater as we go forward. Again, I
think it puts in good perspective and balances our international assets along
with a strong domestic position.
5
So I think, as we look at this next slide, I think we have really answered all
the questions that are on this why Patina Oil and Gas. It makes strategic
sense; it fits what our articulated strategic objectives have been over the
past year or so. Again, this is something that we have been considering for a
long time and this, certainly we're so pleased that we could come about with
this transaction because Patina really satisfies these objectives. And again,
the points that are listed on this page in terms of the very large multi-year
inventory of projects, the balance and risk, the ability to tap in and to take
advantage of what is I truly believe going to be one of the very important
basins, particularly for gas here domestically in the U.S. and that's in the
Rockies and Mid-continent area for well beyond the next decade. And so it's a
great opportunity for us. It gives us the flexibility to continue to
high-grade our portfolio.
And it just kind of goes to this chart. If we would have shown this chart a
week ago, we could have checked three of these boxes. Certainly in terms in
the growth area, in terms of our international developments, we've been making
very good progress this year on our cost reductions both cash and non-cash
costs, and certainly our financial flexibility is enhanced. But again, the one
that we really couldn't check off was the addition and supplement to our
domestic base, and Patina fits that perfectly.
As Tom pointed out, they have just an amazing track record of growth and it's
a complement to the organization, it's a complement to the assets. You can see
an average compound growth rate over the period from 2001 to projected 2005 of
almost 25% per year, and on a reserve basis 30% per year.
I think with that I'm going to ask Dave Stover, from his perspective, to talk
a little bit about our view on the Patina asset base. And I know you'll have
some questions at the end, and Tom and I will look forward to answer those as
well. But I'd ask Dave to kind of step through here these next few slides and
just talk about what we see going forward as this comes in and becomes a part
of Noble Energy.
Dave Stover:
Thank you, Chuck. I'd say this slide is appropriately named. I mean the
existing proved reserve base provides an extensive inventory of stable
production, low-cost operation, significant inventory of high-rate-of-return
projects. The nice blend with that is the large inventory of probable and
possible projects. We see together over 10,000 projects identified, as Chuck
alluded to earlier, at current rates at over an eight-year inventory of
projects.
The other key parameter on here that we're very excited about is the ability
to control the timing and development of these projects. You can see about 95%
of the value is under Patina's operating control. The other piece we've
already mentioned is the focused asset base, again in the Wattenberg and
Mid-continent piece. And again, this blend of two companies gives us the
opportunity to use the expertise of both companies as Patina has a very
strong, highly developed engineering and operating base.
Moving now into a brief overview of each of the areas, starting with the
Wattenberg field, the map indicates how the Wattenberg field is located
adjacent to some of the operations Chuck's alluded to that we're expanding in
the Rockies already. In Wattenberg, Patina is the largest operator in the
field, has a strong track record of growth in the field and, as you see from
the resources, has both proven reserves and the probable and possible reserves
to continue that growth position in the field. Again, large gas position,
close to 70% gas, long reserve life, 13-year reserve life with a lot of
projects. And again, looking at the control item, 99% operated with a high
working interest.
Step through that to the more specifics on Wattenberg. Another exciting part
of the inventory to us is the multi-pay horizons in the field. Concentration
so far has been on the Codell, Niobrara and J-Sand opportunities with a nice
6
blend of opportunities from drilling stimulations and recompletions. Step
beyond that and (inaudible) zones with additional opportunity.
Moving to the Mid-continent area, Patina's been growing their position in this
area, especially in the Anadarko Basin. I'd say around two-thirds of the
Mid-continent value comes from the Anadarko Basin. And on the next slide, in a
minute I'll show you a little better picture of where they're active. Has not
only the gas, growing gas position in the Anadarko Basin both Texas and
Oklahoma portion, but also a nice stable oil production, some shallow water
floods in the Ardmore Basin of Oklahoma. Again, a nice blend of proven
reserves and probable and possible reserves, 70% gas and again a nice long
reserve life, 15-year reserve life with 80% operated.
Drilling down a little further in the Mid-continent area, one of the more
active areas for Patina has been the Buffalo Wallow area in the Texas
Panhandle. Recently approved 20-acre down-spacing, it sets up a tremendous
amount of additional locations in that area to provide continued growth. Also
stepping out into another area, in the Billy Rose area, where they've got a
nice acreage position, early indications have been very promising, and we're
excited to see what that can do.
Also in the Anadarko Basin, planned some other plays, a Red Fork play in
Oklahoma, in the Oklahoma portion of the Anadarko Basin, and then also looking
at some opportunities to expand the water floods. Here the--of the 800
identified projects, probably almost three-quarters of them are drilling
opportunities.
Step into the San Juan Basin. Another nice mix of probable and possible
opportunities compared to the proven reserve base. Production has been small
as it's a new area for Patina, but it's also an area we think that can provide
a platform for growth. And you can see the 26-year reserve life, mainly
playing the conventional plays, Mesaverde, Dakota. Approximately 500 projects
identified in this area, about half of them drilling and half of them
recompletion.
Stepping to the central region, which is primarily Illinois and Kansas Basins
mainly made up of some mature water floods that have really held pretty much
flat over the last few years with very little capital required. Again, about
15 million barrel proven reserves, it's about 11% gas, more oil dominated in
this piece. But again, a long reserve life, 10-year reserve life, and a
tremendous amount of control with 93% of it operated.
The last area I want to mention is the new ventures area. This is an area
we're excited about. Patina's been stepping out there and leasing acreage in a
number of areas, targeting some of the shale formations...really taking some
of their stimulation knowledge and taking it and expanding it and applying it
in some other areas. I guess it's really all I can say about where now it is
in domestic, and it's not Barnett shale. But they've got a position already of
over 70,000 net acres with drilling expected to begin here in early 2005.
The last slide I'll talk about before turning it over to James shows a pie
chart with resources and projects put in a number of different ways. You can
see the mix between the proven categories and the probable and possible
inventory of projects and resources. You can see the largest portion obviously
in the Wattenberg area with the second-largest portion in the Mid-continent
area. I guess with that I'll turn it over to James.
Chuck Davidson:
Thanks, Dave. Before James starts I'll just add one thing. Another attractive
feature here is Patina is considered one of the low-cost operators. Between
the way they've managed their business and the quality of assets that we see
here, it certainly enhances our position, and James is going to start on this
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final section and first start talking about how we see improvements in the
cost structure of our domestic business.
James McElvany:
Thank you, Chuck. As Chuck has mentioned, Noble has been decreasing its cost
structure over the last few years. As we take a look here for the nine months
on a pro forma basis of both Noble and Patina, you can see by this schedule
that we have further reductions in our overall cost structure, down
approximately 6% for this period, and we're very excited about that potential.
If we could, let's share with you the guidance for 2005. This would really be
the first time Noble's had an opportunity to share its guidance. I think what
we have said in the past is we were expecting a 10% production growth for
2005, and if you'll focus there on that first column that is where our
projections still lie. This is the full-year view. You can see continued
enhancement in lease operating cost, SG&A and DD&A has continued to come down
along with the ramping up of some of our international projects.
If you'll take a look there at the full-year pro forma, bearing in mind that
this will be this transaction closing in the March to April timeframe, so it's
really a combination of these two columns that you'll want to build into your
model. We're showing a 10 to 11% combined growth rate. That's obviously from
the combined 2004 numbers. We've given you volumes here of 175,000 to 180,000
barrel equivalents per day of production. You can see further enhancements in
our lease operating cost, this number is without production tax I might point
out, additional reductions in SG&A.
We do see a modest increase on the DD&A side, but bear in mind we're going
from Noble's 30% domestic reserves now in this combined basis to 55% of
domestic reserves. So I think it's natural to expect some increase in that
particular cost structure.
Exploration costs, exploration expense stays basically flat on the combined
entity basis. As you saw in the previous slide, that really brings the
exploration down on a per unit basis.
Capital expenditure numbers included here just under a billion dollars for the
combined entity. And then the effective tax rate comes down, and we're
expecting the deferred percentage to increase modestly.
On the next page, this is a view of the combined proved reserves for the end
of 2003 with Noble's 457 million barrel of oil equivalents and Patina's 253
million barrel equivalents. You can see our placement here in our peer group
with just over 700 million barrel of oil equivalents.
On the next slide, the enterprise value, you can see Noble winds up at a $7.7
billion pro forma number and its placement within its peers. If we could take
a quick look at the capitalization slide, you can see Noble's current
position. This is projected to the end of this year. We currently will have by
the end of the year approximately $880 million of debt giving us currently a
38% debt-to-book capital ratio. This in the pro forma slide, see the
acquisition loan of $1.3 billion that we envision that being a revolver, a
five-year revolver, which provides us with maximum pay-down flexibility. You
see the additional bump in the credit facility there for the balance that
exists against Patina's current credit facility.
This puts us at just about a 45% debt-to-book capital ratio on a pro forma
basis. The good news is this combined entity still generates very strong free
cash flow. On the next slide you can see one of our points there about the
middle of the page that debt reduction levels will be down within three years.
There's actual possibilities that that can occur before that timeframe. We've
given ourselves a little latitude.
8
I mentioned earlier the five-year financing to provide financial flexibility.
We like this also because the large amount of free cash flow puts us in a
position to take on even larger potential expanded projects in the deep water
and in the international arena, certainly not leveraging ourselves up as much
as would have historically as a result of this large quantity of free cash
flow that'll be generated. And we have a hedge position that we are putting in
place to ensure that we do obtain these estimated free cash flows.
On the next slide, our hedging strategy itself is designed to protect cash
flow from operations for both capital needs and debt reduction. You can see
currently that we have hedged against Noble's existing production, for
approximately three and a half years starting in May of `05 through 2008,
approximately 80 million a day in gas, 7,000 a day in crude. The benefit of
layering these into Noble's existing production, which in the outer years has
not been hedged, is we will not expose ourselves to any P&L impact during the
interim period pre-closing as a result of not having this treated as a hedged
transaction.
We do have... we are in the process of putting on fixed rate swaps, and our
plan is to go up to 75% of Patina's existing production. And with that I'm
going to let Chuck close this up.
Chuck Davidson:
Great. Thank you, James, and again we want to make sure we have plenty of time
for questions. But clearly, we see this as an important strategic
repositioning for Noble Energy. We will come out of it certainly stronger and
a more balanced company, reserves and production increasing 50%. But I think
even more importantly is the enhancement of the domestic business,
particularly domestic onshore and the very significant portfolio of
opportunities and multi-year projects that this brings us that will create
opportunities to invest some of that free cash flow that James spoke about.
We see our exploration going forward as a strong program, one that continues
to focus on significant opportunities as we look at our international program,
deep-water program. We continue to move our exploration towards things that
can have a significant impact, and this transaction will allow us to continue
on that path by adding to the inventory a deep breadth of exploitation and
development projects. And, as James pointed out, this company with its balance
sheet and its stability, its growth profile, its portfolio and asset quality
really will lend itself nicely to being able to take on major projects going
forward.
Talked about the big inventory projects. I think there is a very nice
synergistic effect here of bringing Patina's excellent expertise in these
onshore long-lived gas basins, to bring them over and to really aid in Noble's
current portfolio as well. Domestic costs continue to improve. Clearly, we see
this as immediately accretive to earnings and cash flow and coming out of it
combined additional free cash flow.
So again, we're real excited about the opportunity. We're looking forward, I'm
really looking forward, to working with Tom and the Patina team as we go
forward to pull together what we spoke about when we started to think about
this as really a great energy company with both domestic and international
expertise and domestic and international capacity for growth.
I think with that, Michelle, Tom and I are certainly available and would like
to open it up for questions.
Operator:
Thank you. We will now begin the question-and-answer session. To place
yourself into the question queue, please press star 1 on your touchtone phone.
If you're using a speakerphone, please pick up your handset and then press the
star 1. Please go ahead if you have any questions. Your first question comes
from Shawn Reynolds. Please go ahead.
9
Shawn Reynolds:
Hi, Chuck.
Chuck Davidson:
Good morning.
Shawn Reynolds:
Congratulations. Real quick, with regard to the Gulf of Mexico production, you
said pro forma it's going to represent about 24% of total and an increasing
part of that is deepwater. Could you break that down between deepwater and
shelf?
Chuck Davidson:
Well right now, when we look at Noble right now, we're running about, as our
total Noble about 7 to 8% deep water and the remainder is in the shelf. So if
you look at it, two-thirds shelf and about one-third deepwater. And basically,
as we go forward, we see this, as we've talked about before, the deepwater
component is rapidly growing, especially with the three deepwater projects
we're bringing on in the next few years.
Shawn Reynolds:
What would be the basic program for the conventional shelf?
Chuck Davidson:
When we look at the conventional shelf, you know, we continue to look at
exploitation opportunities there. But we have significantly reduced our
exploration on the shelf. We do see some things, and we are pursuing some
opportunities in the eastern shelf in the carbonate play, and even now a
deeper Cotton Valley play. But certainly more recently here we've been really
focused on the exploitation opportunities we have on the shelf and have moved
the exploration in just a few niche areas and clearly moved more of that and
are shifting more of that in 2005 into deepwater.
Shawn Reynolds:
Right. With all this free cash flow you're generating, you're probably going
to address the balance sheet, I would think a little bit. But, you know, that
wouldn't take much work. Would you, you know, kind of envision eventually
getting to a share repurchase program?
Chuck Davidson:
I think that's a little further down the road. But as we've talked in the
past, we have to look at all the opportunities, the share repurchase,
dividends. You're right, in the near-term we'll focus on the balance sheet,
but I think we can address that fairly quickly, especially with the current
commodity market and our ability to hedge a significant amount of the
increased production. So we have to look at all of those as well as make sure
that we've got capacity to address what could be down the road fairly
significant opportunities in international. As we moved our exploration into
the larger projects there, some of those have some very significant follow-up
development opportunities on success of exploration, particularly in West
Africa.
Shawn Reynolds:
Thank you.
Chuck Davidson:
Thank you, Shawn.
10
Operator:
Thank you. Your next question comes in from David Khani. Please go ahead.
David Khani:
Yeah, hi guys. What kind of prices do you think you can get for your hedges
looking out through 2008? What does the strip bear for us right now?
Chuck Davidson:
Well, you know, as we noted, our average that we have done already was a
little over $6 on gas, I think it was $6.13, and that's an average over that
period of time. And the average crude for those hedged is $38.58. And of
course these are very recent hedges, so represents really the market today.
David Khani:
Okay.
Chuck Davidson:
You know, it shifts around. I mean, but you can look at the curve and see the
backwardation, but basically while those are the averages, and we'll be
providing all the details by year or by quarter on our hedges as we've done in
the past. They basically follow the curve.
David Khani:
Good. Where do you think you're going to add value on the drilling side? What
do you think, sort of some of the hidden value? Is it the trifrac, the
five-spot, the San Juan basin program that is I guess pretty early stage, or
are you putting some extra... is there any value also for some of this new
venture that's been... that Tom has been hiding from us for a while?
Tom Edelman:
Should I try that, Chuck?
Chuck Davidson:
Yeah, I want you to try that.
Tom Edelman:
Well, first of all, I hope I haven't been hiding it from you. We like to think
we are being prudent as we accumulate the acreage. But in any case, we are
obviously enthusiastic about this shale play that we're putting together, but
it's early stage and the first drilling won't take place till the end of the
first quarter. So we're optimistic but we have no particular evidence other
than our geological and geophysical work to base it on. So that remains to be
seen although we'll probably know quite a bit in the first half.
In terms of what the Patina assets contribute here in terms of reserves and
production, other than the shale play, we think it's very much a continuation
of what we've been doing and talking about. During the course of '04, the
Niobrara completions have become dramatically more important in terms of how
we see the next couple of years and they continue to work superbly. Trifracs,
which they're still a major learning curve, we think ultimately will impact
most of our wells very much as the refracs have, and there continues to be
quite a lot of recompletion work to alternate zones, shallower zones in the
case of the J- and the D-sand completions, deeper and some shallower zones in
the case of the Codell and Niobrara. So in the Wattenburg field we think we'll
be thinking of things and expanding that base, you know, looking out five and
seven years from today.
11
And the Mid-continent we've talked a lot about it. We just in November got our
down spacing in Buffalo Wallow, which probably adds three and a half to four
years more continuous drilling to fully exploit that field. Billy Rose is very
early days, but we are certainly delightfully encouraged by the three
completions that we've got on there, and we hope it becomes a major
contributor as well. So really nothing other than the shale play that will be
de novo, it'll be a continuation of what we've been talking about certainly
throughout '04. And San Juan, as you alluded to, we have high hopes for but
again it's very early days.
David Khani:
Chuck, on this new venture, have you put much value in the acquisition here?
Chuck Davidson:
I think, you know, as we've gone through it we've, you know, fully valued all
the areas. And as Tom pointed out, it's early and it's building acreage, so I
think we've reflected that state that it's in properly. I think, Dave, though
as we look out, I mean clearly the substantial value of this company is in its
main key assets. And I think the important thing is as we've dug into them and
looked at them, and there are some things that we have seen that would add to
it, but primarily it's these type of assets continue to generate
opportunities.
They are very, I think, they're very technology-sensitive, meaning that as the
expertise of the organization and of the industry goes through that they're
the type of assets, multi-zone assets, tight gas, tight reservoirs that
continue to generate more. And I wouldn't underestimate the value of having
this type of organization and expertise as it layers onto not only our
existing assets in the Rocky Mountain area, which are really more in their
infancy than the Patina assets are certainly in terms of the level of
development, but at the same time it really opens up the door for us to enter
into new areas as well.
David Khani:
In your cap-ex budget that you put out for `05 here on the combined entity,
are you shifting capital more towards accelerating your plays and also
accelerating what Patina was initially going to do...?
Chuck Davidson:
I would say that first of all, our onshore domestic program for 2005 is
significantly increased. This is the first time that we've talked about the
Piceance Basin position where we have some 30 wells that were planned for
that. It's kind of like one of those areas that Tom talked about, but we
didn't talk about it because we were adding acreage in that area. We've now
built a nice acreage position. We're a 100% working interest owner, we're
controlling our destiny. I think we're now on the sixth or seventh well in the
Piceance Basin and again it complements us very well.
Overall, in 2005 we're showing an increase in $80 million over our prior
onshore program. And I would add that the capital that's shown attributable to
the Patina assets is up from $230 to about $265 million, $260 million.
David Khani:
So both programs onshore are going to accelerate?
Chuck Davidson:
That's exactly right.
David Khani:
Okay, and then accretion, give us a sense of what you think the accretion is
here for EPS and cash flow per share.
12
James McElvany:
Well, we haven't put out any earnings projections on this. We do see based on
some of the estimates that we've done on the first call price deck out there,
taking into account our plan to hedge up to what would be the equivalent of
75% of the production here and, more importantly, the fact that Patina plans
to terminate their existing hedges. So you can't look at it from a standpoint
of maybe what was being modeled currently for Patina because that takes into
account the hedge accounting that they had to recognize. So when you take all
those factors, we're very confident that there will be shown a very strong
earnings accretion and strong cash flow accretion as well beginning in 2005.
David Khani:
Would you think it's the 5% percent level, is it the 10 to 15% level? You
know, I know it's hard but based on what were first call estimates are out
there, give us a sort of sense of magnitude.
James McElvany: Dave, I just don't want to...
David Khani:
You don't want to...Okay, all right. And then the last question before I let
other people is any potential minor asset sales or larger asset sales from
the...?
Chuck Davidson:
Well, I guess I would just say that, you know, we always are looking at the
portfolio and we had some asset sales that finished up earlier this year. I
think it's a bit too early here to jump into that. I think it's important
right now that what we want to do is put together a good integration plan with
the two companies and look at how they all fit together. I would say that in
our looking at financing and cash flows we did not factor in any proceeds from
asset sales.
David Khani:
Great. Okay, thank you, guys.
Chuck Davidson:
Thank you, Dave.
Operator:
Thank you. Your next question comes in from Ellen Hannan. Please go ahead.
Ellen Hannan:
Good morning, Chuck.
Chuck Davidson:
Good morning.
13
Ellen Hannan:
Congratulations.
Chuck Davidson:
Thank you.
Ellen Hannan:
I think most of my questions have been answered. One question I had - we
visited with you a couple of weeks ago and I asked you if there was anything
missing in your portfolio. You did say that you were looking for more exposure
in the particular areas that Patina brings to you, however at the time you
thought that the current acquisition market was fairly expensive. Now, could
you comment on it a little bit, taking into consideration... obviously, I
think we all understand that there's a huge amount of inventory that Patina
brings to you.
Chuck Davidson:
I think that as we look at this and certainly we looked at this in a number of
different ways, that the real value here was the running room and the number
of projects. And I think, Ellen, what I really saw that, you know, at least in
our experience where it's been, you know, fairly expensive is maybe on some of
the asset sales and things like that where maybe we just couldn't see as much
upside and some of the other benefits that we've talked about as we look at
this one. So it's unique, there's no question about it. I think it's a unique
opportunity. You know, I think Tom has already very well commented on how it's
an opportunity for Patina shareholders, but I think it's a tremendous
opportunity for Noble shareholders and the combined shareholder base going
forward.
Ellen Hannan:
Great.
Chuck Davidson:
This is something that will be in our portfolios for many, many, many years.
This is not a here-today-gone-tomorrow. This is a significant repositioning of
the company.
Ellen Hannan:
Terrific. Thank you very much.
Chuck Davidson:
Thank you.
Operator:
Thank you. The next question comes in from Ryan Zorn. Please go ahead.
Ryan Zorn:
Good morning, Chuck.
Chuck Davidson:
Good morning.
Ryan Zorn:
I wondered if you could be a little more exact on your cap-ex progression as
it relates to these assets. And I wonder if you could break out the total that
you'll need to develop the pud base and then what you'll need to do the
unproven inventories that you're getting.
Chuck Davidson:
As we look, and we certainly looked at kind of the history of converting not
only puds, but probables and possibles. And for instance when you look at the
history and kind of our projection going forward we see that the access cost
whether it's a pud or near-term probables and possibles are around $6 to $7 a
barrel. If you kind of go out in time, we probably risk a bit more, and so we
would see that cost perhaps growing a bit. But I think it's really too early
to tell. I mean that's just basically a function of doing your normal risking
14
out into the future. And I guess that in terms of just the absolute capital
level if you sort of look at these assets, we see... you know, this is a
program that can go to $300/$350 million over the next couple of years.
Ryan Zorn:
Okay, thanks, that's helpful. Any idea on a peak rate achievable from these
assets?
Chuck Davidson:
Well, we see it as a growing profile going forward. I know that for instance
we're at... it looks like the assets will be up about 12% next year over this
year, and we see continued growth going into 2006, especially with the
acceleration of capital investments. So they're pretty long-lived. I think,
you know, what we've really looked at, and we're careful is to make sure we
match production growth against infrastructure capacity, offtakes out of the
Rockies, again kind of a longer-term program, but it's not something that we
see bending over quickly. We see this as growing for a number of years.
Ryan Zorn:
Okay. Obviously you've been conversing since July, you've had a lot of time
and your action today obviously speaks to your attraction to the portfolio
that you're getting here, and I guess I'm just wondering if you might be able
to rank a little bit for us the go-forward portfolio. And do things start to
get squeezed out or does it become less attractive to you based upon what
Patina brings to the table? And I guess the real driver of the question is how
does the Gulf Coast fit in going forward?
Chuck Davidson:
I think as you look at it going forward, I think that, you know, we have
continued to reduce our reliance on particularly the Gulf of Mexico shelf, the
traditional shelf. We look at the deep shelf, and I think this transaction
just highlights that direction and a continuation of that direction.
Ryan Zorn:
And onshore as well or just...
Chuck Davidson:
No, I wouldn't get to that point because the onshore Gulf Coast, yes it is
shorter-lived, but we still have a very significant inventory of projects that
have good returns. I would say that it does allow us and it fits very well
with the strategy that we talked about recently is that... that we're looking
now at things in the Gulf Coast that are maybe a little bit greater, more
significant in potential, and so we... again, maybe we'll be diversifying our
exploration portfolio towards maybe some more significant prospects, and I
think that's already happening for our 2005 program. But again, it's a very
strong program.
Ryan Zorn:
Okay.
Chuck Davidson:
And, you know, I want to go back to a question because I think that, you know,
I think it's important to give people a sense of where we are on accretion and
give... maybe go ahead and give a little bit of guidance here even though it's
fairly broad, but I think just so everybody knows kind of what we're thinking,
we're seeing from our perspective that this is accretive in kind of the... on
a cash flow basis in the mid single-digit range and certainly in the teens on
earnings per share. Again, taking into account the hedges we put in place, the
unwind of the existing hedges going forward.
15
Ryan Zorn:
Okay. Thanks, Chuck.
Chuck Davidson:
Thank you.
Operator:
Thank you. Your next question comes in from David Cameron. Please go ahead.
David Cameron:
Good morning. Congratulations.
Chuck Davidson:
Thank you.
David Cameron:
A question, and maybe I missed this, did you mention a break-up fee at all?
Chuck Davidson:
Yes, the break-up fee, obviously there's lots of different categories in
there, but it's on page 5 of our handout and it's down at the bottom. It's
$100 million.
David Cameron:
Okay. Another question - the 263 proved reserve referenced in the text, is
that... is that... Chuck, is that your number or Tom, is that your number?
Where did that number come from?
Chuck Davidson:
Well, I'll let Tom talk about, you know, where it comes from but I'll just
start off by saying we've mutually looked at these assets and that was kind of
our estimate at a point in time. And I know that they've told us they're still
working on their year-end numbers, but that was kind of our estimate at sort
of a point in time. Tom.
Tom Edelman:
I can help there, Chuck, David. That's a low estimate of what we think we'll
book at year-end in proved. Of course we're used to talking in MCFEs but
there's just a six to one conversion. We think we will be over, maybe a bit
over the 1.60 level at year-end but we won't finish reserves till probably
middle of January, but we're far enough along that we're confident we'll
exceed this number.
David Cameron:
Okay, that's why I was asking, it seemed a little light. And last question for
you, Tom. Can you take us through your mindset a little bit - when you... you
know, you're in a position where you needed to either... I guess you wanted to
either grow, you know, or find a way to maximize shareholder value. Can you
walk us through your mindset and the board's mindset as to why now versus, you
know, 12 months from now after you acquire some more assets?
Tom Edelman:
Sure. Well, in terms of mindset, two things. One, as you know, we have from
our inception said that a) we're only interested in growing and b) that the
company is always for sale if a transaction could be done on a basis that we
thought was more attractive to our shareholders. And the mindset that really
led to this was we were approached by Chuck and by his advisors in terms of
16
this possibility as we have been by a large number of others over the year. We
thought this was an unusually attractive combination in terms of the strategic
fit that Chuck and Dave have alluded to here.
We think the balance between the international and domestic can actually lead
to a re-rating of the stock based on size and geographic balance to increase
its cash flow multiple once the deal is absorbed, and our feeling was that
this was a very attractive strategic transaction for our shareholders. It was
not that we didn't feel we'd continue to grow, although as I indicated in my
quote in the press release, we have had a long-term theory that once you get
to somewhere in the $5-billion range, which we are not at but we're
approaching at a fairly rapid pace, that we would probably need to figure out
how to access international. And this has the virtue from our perspective for
those shareholders such as myself who will continue forward as a major
combined investor in this company, that this gives us a superb international
presence and a management team led by Chuck that we think can enhance us both
on the international and the domestic side.
So we're trying to enhance our shareholder return, it's that simple. We'd have
done it 12 months ago, now or 12 months from now with the right opportunity
and we felt this was the right opportunity.
David Cameron:
Okay. Thanks. I'll let somebody else jump on.
Chuck Davidson:
Thank you.
Operator:
Thank you. Your next question comes in from Sam Sabbagh. please go ahead.
S.T. Telefergotta:
Yes, hi, it's S.T. Telefergotta(ph) for Sam Sabbagh. Are there any performance
or earnings requirements or limitations on reserve restatements in the merger
agreement?
Tom Edelman:
None whatsoever.
S.T. Telefergotta:
Great, great. And does the material-adverse effect language exclude changes in
the oil and natural gas industry from being considered a material-adverse
change?
Tom Edelman:
We don't believe... the document is long and will be filed shortly of course,
but I think, Chuck, it's fair to say that us and our advisors worked very
diligently. We intend to close this transaction as publicly announced but
neither one of us or our boards would consider it if that wasn't our
overwhelming intention. We all have fiduciary duties that we will honor of
course in this and every other situation, but there are no outs in this
transaction that we were not forced to put in by Delaware law or our fiduciary
duties.
S.T. Telefergotta:
Great. Thank you very much. Congratulations.
Chuck Davidson:
I would absolutely agree with that.
17
S.T. Telefergotta: Thank you.
Operator:
Thank you. Your next question comes in from Jack Aydin. Please go ahead.
Jack Aydin:
Hi, Tom. Now I know why you never answered my call.
Tom Edelman:
Jack, it's unlimited affection, it's just that we had to put Chuck at slightly
higher priority temporarily.
Jack Aydin:
Okay. Now as regards to termination, let us assume while Noble stock is go
down to a certain level and the value of the transaction for your shareholder
is basically deteriorate... is that... will be consider possibility of
terminating?
Tom Edelman:
Yes and no. There are bizarre circumstances which we have spent some late
nights running through where one party or the other, as I indicated, would be
forced by its lawyers and Delaware law and fiduciary responsibility to take
action. In my opinion, after 35 years of doing this, as you know, first on
Wall Street and then later in this industry for a quarter of a century, they
will not happen. That is my judgment.
Jack Aydin:
Okay, the second question: Do the share... do I read it correctly, the
shareholders have option to take all their, you know, interest in Noble stock?
Tom Edelman:
Yes, this is a cash election. Every shareholder will have a choice to take
stock or cash. It is subject to a proration meaning if everyone chose to take
stock, the deal would be prorated and every single person would end up at the
exact 60/40. What we are hoping, and the structure is designed to do, of
course not perfectly, is to as many people as possible who are anxious to have
the ongoing investment, because we think it's going to be a very attractive
investment, can get that stock or at least tilt that direction and those who
want to take their profits can do that. So it's subject to the corporate
constraint of the 60/40. It will be the choice of the Patina shareholders
which way they go.
Jack Aydin:
Well, I, you know, it's a good deal, I think it's a very good deal for Noble.
I'm not so sure I like it for you.
Tom Edelman:
Well, obviously, Jack, you've known me a long time. I do things that I believe
- doesn't mean I'm right - are in the best interests of our shareholders And I
and our board unanimously agree after meeting with Chuck, talking about their
plans, talking about these array of assets that Chuck has gone through, we
think this is going to be an exceptional company, and we think once we get the
full material filed with the commission, etc., that you're going to see some
information and become more and more confident that this thing can have
multiple expansion as well as terrific results over the next couple of years.
You put that into the mix, it becomes very powerful.
18
Jack Aden:
Congratulations in any case.
Tom Edelman:
Thank you, Sir.
Operator:
Thank you. Your next question comes in from Michael Emerald (ph). Please go
ahead.
Michael Emerald:
Can you please explain to me the adjustment mechanism in more detail? Does the
cash consideration get adjusted and the stock consideration get adjusted? How
exactly is that worded?
Chuck Davidson:
You're talking about on the equalization?
Michael Emerald:
Yes, the equalization.
Chuck Davidson That's the price equalization?
Michael Emerald:
Right.
Chuck Davidson:
As we look at... obviously because the amount of cash in the transaction is
fixed and the number of shares are fixed, I mean conceptually as you think
about it, and our stock price moves up and down, as we get to closing the
important thing is as these shareholders have elected either cash or stock or
some mix that they get equivalent value from each. So at the end, the
equalization will allow so that they will be getting equal value whether it's
from the $14 (inaudible due to background noise) plus the stock or whether
they take it all stock, that they get equivalent value. But basically you'll
be looking at Noble stock price (inaudible) as we get close to the closing to
make sure it's all equalized out and everybody gets the same equal value.
Tom Edelman:
Can I try, Chuck, because this is very confusing and we spent some long nights
on it.
Chuck Davidson:
Yeah, you have a different (inaudible due to background noise). Fire away.
Tom Edelman:
The way I look at this is there is an amount of cash and an amount of stock
including debt assumption that totaled roughly $3.4 billion. That value will
vary not because of the cash which of course stays constant, but because Noble
stock will go up and down. Down of course in the short run because of the
arbitrage. Our conviction is it will go up eventually. But in either case it
will go up or down. The total pot, the cash and the stock will be valued at
the time of the election. And let's say it has gone up, the total pot, the
value of that cash and stock by 10%, the cash price per share and the stock
price per share obtainable each go up by 10%, meaning you look at the growth
in the whole pot or deterioration and you spread it equally.
19
Another way to do this very simply is start with the price the night before
announcement of Noble of 61.54. Any rise or fall, and I'm not going to explain
why, just trust me, any rise or fall in that stock price, 37.5% will enure to
a POG share. So for every dollar Noble stock is higher or lower. When the time
comes for the exchange the Patina shareholder will get 37 1/2 cents more or
less as appropriate.
Michael Emerald:
And the example given in the release, 37.89, both the cash electors and the
stock electors would receive 37.89?
Tom Edelman:
Yeah, that, assumed that nothing happened, meaning the stock never changed
again.
Michael Emerald:
Gotcha. Can you disclose when the pricing period is?
Tom Edelman:
The lawyers had more fun with this than we could stand up to and including
3:00 in the morning. Forgive me, I'll let you read it when it's filed because
I'm certain I'll say something incorrect.
Michael Emerald:
Okay.
Chuck Davidson:
I can't possibly repeat that one correctly. Next question.
Operator:
Thank you. The next question comes in from John Seltzer. Please go ahead.
John Seltzer:
Historically you had some international plays or things that you've been
involved in. You maintained I guess some of those connections or do you have
some international areas of interest to you?
Tom Edelman:
I'm sorry, was that question addressed to me?
John Seltzer:
Yes, it was.
Tom Edelman:
My goodness, I'm very flattered. I consider Chuck the international expert.
Yes, I've worked going back to my Snider Oil days quite extensively
internationally, although it was a pale shadow frankly, although very
successful, of what Chuck and his team have done. And obviously to the extent
that I can be helpful, or our management can be helpful going forward, but at
least the way both sides are looking at this is except for something
serendipity our contribution will be our expertise, contacts, familiarity,
onshore domestic but certainly we're overwhelmingly looking to Chuck and the
Noble side for their expertise in the deep as well as shelf Gulf of Mexico and
internationally.
John Seltzer:
And who are the advisors on the deal?
20
Chuck Davidson:
J.P. Morgan and Petrie Parkman on the finance side and Skadden Arps legal for
us and Cravath for legal for Patina.
John Seltzer:
Okay. Thank you and congratulations.
Chuck Davidson:
Thanks, John.
Operator:
Thank you. Your next question comes in from Hai Weng(ph). Please go ahead.
Hai Weng:
Hi. Tom, you mentioned that you were approached by other parties in the past.
Once you were approached by Chuck, did you contact other parties? Were there
any sale talks at all (ph)?
Tom Edelman:
We have spoken to people and met with other suitors, I'm embarrassed to tell
you, as recently as 10 days ago on unsolicited approaches because we didn't
think we ought to shut it off until this was public. I'm embarrassed to tell
you this is probably in the dozen or more category fairly serious discussions
that we've had. Our feeling was we were extremely knowledgeable about the
value of this. The thing that was convincing was the strategic benefits that
we saw of combining with Noble and Chuck's organization. So we never stopped
discussions with other people, but we did not hold even a mini-auction process
here, we didn't believe in our or our advisors' view it was needed.
Hai Weng:
Okay, and my follow-up is both parties conducted pretty extensive due
diligence I gather?
Tom Edelman:
Very extensive.
Chuck Davidson:
Yeah, very extensive. And I would add that Patina did a very extensive due
diligence on our international portfolio and certainly I think from our
standpoint we got a chance to spend a lot of time understanding the onshore
assets of Patina. We both use a common engineering firm that helps us do our
reserves and they were able to participate in the process as well.
Tom Edelman:
And on the international front we hired special political risk firms, Wood
McKenzie and PFC, to advise us on the specific country and political risks as
well as some of the specifics of the project arrangements and took a lot of
comfort from their expertise because it is not... despite our limited
familiarity, it is certainly not our area of expertise.
Hai Weng:
Right, okay. Great. Thank you very much.
Operator:
Thank you. Your next question comes in from Andrew Brown. Please go ahead.
21
Andrew Brown:
Yes, I was wondering, you're using a five-year revolving loan to finance a
large part of this. Is your intent to just sort of as you go along pay that
down out of cash flow and then keep any capacity for dry powder for future
acquisitions? Or would you look to term that out with perhaps a bond deal at
some point in the future?
James McElvany:
We will anticipate paying down the $1.3 billion revolver. I might add that we
do in fact have some dry powder. Noble has, in addition to the $1.3 billion, a
commitment that we have received an additional $800 million of which we think
we'll have at least $400 million of liquidity which would allow us to take on
any reasonable size acquisition in the intervening period.
Tom Edelman:
May I join you here for a moment? I think it's fair to say without new
transactions, Chuck, that this combined entity at current commodity prices we
expect to throw off half a billion dollars or more of free cash flow.
Chuck Davidson:
Yeah, and as a result absent anything else, we can see that debt coming down
dramatically, very quickly.
Tom Edelman:
Yeah, I mean we really look at this combined company from the Patina
shareholders and board's perspective as very similar to Patina in that we look
at the debt almost as transactional. That the strength of the business, the
production profile and the free cash flow, particularly backed up by the
hedging, is so strong that this thing is very much self-financing except for
really major transactions. So with Chuck's investment grade rating, with those
kind of cash flows, and with the wildly receptive markets to anything from
energy at the present time, I don't think we regard this as having any
financial constraints whatsoever.
Andrew Brown:
Okay, thank you.
Operator:
Thank you. Your next question comes in from Sam Kidston. Please go ahead.
Sam Kidston:
Yeah, hi, Tom, just wondering what election you're going to take in the
merger.
Tom Edelman:
As I told Chuck, I will be somewhere between the average of my shareholders
and all stock. I have some fairly complicated tax arrangements going back to
when I formed Patina that I have to go through unfortunately with accountants
and even estate lawyers despite my extraordinary youth. But I will at the
minimum take the amount of stock the average shareholder does, at the maximum
I will be 100% stock. I am very enthusiastic about this entity as well as its
potential as I said to be re-rated in the market value-wise.
Sam Kidston:
Excellent. Thank you.
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Operator:
Thank you. Your next question comes in from Charles Slotnik. Please go ahead.
Charles Slotnik:
Good morning and congratulations on this extraordinary transaction. I just had
a couple of questions, trying to go through all the numbers. In terms of
Noble... excuse me, POG shares outstanding for all these very difficult
calculations, is 70,624,000 a good number or what's the number we should be
using?
Tom Edelman:
It gets a little complicated but I'd use 72 million as primary outstanding.
And total complete dilution, meaning forget treasury method or any other
calculation, every option and warrant is approximately 80 million. Now most of
those will not turn into shares because, as you'll see in the filing, they
roll into securities that are exercisable into Noble stock. In fact, one of
the things that we have obtained and we thought was very important that has
been very well received by our key employees, management as well as technical
is they will retain the right to hold their options and exercise them into
Noble stock, so they're going to have a big vested interest in the ongoing
success of the enterprise as will I and Jay and Dave.
We very much bargained for the right for ongoing participation. So I'd use the
72 for starting and the 80 fully diluted but you can't use the 80 if you're
doing any per share because most of it will stay in its existing form, just
with the right to exercise into Noble stock.
Charles Slotnik:
So if I look at the 72 million shares you're talking about and a fixed pot of
27 million Noble shares are going to be issued along with 1.1 billion shares
in cash, dollars and cash, assuming everybody went for all stock the proration
would roughly be, there would be 72 million shares... 27 million shares
divided by 72 million shares outstanding issued to POG shareholders and they
would divide up 1.1 billion in cash among those 72 million shareholders. Is
that correct?
Tom Edelman:
It's basically right but I at least and Chuck, it's your lead here, but I
think the detailed calculations are better done offline. We have over 200
people here, it is a very arcane area, and it moves depending on shareholder
elections and the proration. I'd suggest with either Dave Kordner (inaudible)
or Mr. McElvany that we discuss this offline and not take up everyone's time
because...
Charles Slotnik:
Okay, we'll take it up offline but is the real 60/40 close to 62/38 at the end
of the day?
Tom Edelman:
Not that we know of.
Charles Slotnik:
Okay.
Chuck Davidson:
No, no, no, it should be very approximate to 60/40. You've got to make some
assumptions about, you know, where everything is going but we can....
Charles Slotnik:
We can pick it up later. I appreciate your time.
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Chuck Davidson:
Yeah, I think we need to pick it up later. Let's... okay. Next question please.
Operator:
Thank you. Your next question comes in from Anna Chronis. Please go ahead.
Chuck Davidson:
Hello?
Operator:
Ms. Chronis, please go ahead.
Steve Diane:
Oh, hi, this is Steve Diane for Anna Chronis. Hi. My question relates to a few
questions ago you were asking... someone asked you if you had held an auction
process and you said no but that you had spoken to someone as soon... as recent
as 10 days ago. Why didn't you? Undoubtedly you had other interested buyers.
Why didn't you hold an auction?
Tom Edelman:
I assume that is addressed to me.
Steve Diane:
Yes.
Tom Edelman:
I don't actually believe in them. I think they're highly disruptive to the
company while you go through the process. We held a controlled auction I guess
about two and a half years ago, it may even be three years ago, and it did not
work nearly as well as several direct negotiations we've had, even ones unlike
this that did not successful conclude. We were convinced that in the right
strategic situation the way to maximize the value was to find the right
partner and put together a deal that was as close to optimal as we could get
for both parties.
Steve Diane:
Right, but two and a half/three years ago the business was in a completely
different environment and you undoubtedly did have other interested, you know,
buyers of the company. So wouldn't it be, you know, the fiduciary
responsibility to your shareholders to put this company up for auction?
Tom Edelman:
Well, obviously since I'm not in the habit of breaking the law, I don't
believe so. Look, it's a judgment call...
Steve Diane:
This has nothing to do with law. I mean...
Tom Edelman:
Fiduciary duty is very much a matter of law.
Steve Diane:
Well, yes, that is but putting up the company for auction wouldn't break any
laws.
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Tom Edelman:
No, of course not. It's what you just said, if I breached our fiduciary duty
and our board did, that would be breaking the law.
Steve Diane:
That's correct.
Tom Edelman:
Now, we believed this was the way to maximize the value to our shareholders.
It is, I will be the first to admit, a judgment call just like whether you
list your house exclusively or through multiple listings. It's a judgment call
as to what will optimize the value. We believed this was the optimum solution
for our shareholders and, as I mentioned, we have tested this market a lot
including a very aggressive potential buyer who as I said I was with as
recently as 10 days ago. We believed this is a superb transaction for our
shareholders and that is why I and the board unanimously recommended it.
Steve Diane:
Right. Also you mentioned that you have a break-up fee of $100 million. Is
there language in the documents that allows for other buyers to come in with a
superior offer?
Tom Edelman:
Absolutely.
Steve Diane:
Absolutely?
Tom Edelman:
Either side can receive a superior offer and then it gets complicated so I'll
defer to the filing if you'll forgive me, but anyone can come in with a
superior offer and buy either one of these companies and break up this deal.
Steve Diane:
Okay. Thank you very much.
Operator:
Thank you. Once again if there are any questions please press star 1 on your
touchtone phone. Thank you. There are no questions at this time.
Chuck Davidson:
Well again, thank you very much for joining us today. I know both Tom and I
are extremely pleased at the announcement that we're making here. We think
that combined it's going to be an outstanding company. I know that I am
certainly looking forward to working with the Patina organization in carrying
forward and developing what should be an outstanding company showing growth
and value creation for both sets of shareholders into the future.
Tom Edelman:
I share those sentiments. I'm sure we'll both be speaking to you along with
Dave Kornder (inaudible) and a number of our key staff members over the next
weeks as this proceeds, but I think Chuck and I are absolutely aligned as is
our boards that this is very, very much in the best interests of both
shareholders and should lead to a far, far stronger combined company than
either company in the short run is able to deliver.
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Chuck Davidson:
Thank you. With that I think... we appreciate your attention this morning and
we'll close out the call.
Operator:
Thank you very much. This does conclude today's conference call. Please
disconnect your lines and have a wonderful day.
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