No one disputed the idea that merging Anadarko Petroleum Corp. with Union Pacific Resources Group Inc. will create significant long-term benefits for both independent producers. But the market immediately questioned the $4.4-billion deal's near-term implications, particularly for Anadarko. The Houston independent's common stock dropped from $38.75 into the $34 range the day the combination was announced. UPR shares rose a modest 18.75 cents to $14.6875 during the same period. "This transaction gives a greater size and platform for growth than either company would have had alone," a buysider said while at the Howard, Weil, Labouisse, Friedrichs Inc. energy investment conference in New Orleans. The Anadarko-UPR deal was announced during the conference. "It also moves Anadarko's cash flow forward to about $7 per share now, rather than by 2002 or 2003. And you have to credit [UPR's] George Lindahl for being willing to do this deal and have [Anadarko's] Bob Allison be CEO." "It's a pretty fair deal," observed Mark E. Fischer of Banc of America Securities LLC in Houston. "The companies balance themselves out. Anadarko is at one end of the spectrum, with strong production and reserve growth. UPR is at the other end, a little overlevered and trading at a deep discount. So Anadarko traded some of its upside to UPR for cash flow and asset value. It could be argued that this merger would create a more balanced company. The problem is that investors typically seek balance in their own portfolios. They normally aren't interested in having companies do that job." Allison, Anadarko's chairman and CEO, declared the merger the biggest development for Anadarko since the independent was spun off from Panhandle Eastern Pipeline Co. in 1986. "It creates one of the largest exploration and production companies in the world in terms of production, lease acreage and drilling activities. But it's not about being the biggest company, but the best. While it will create cost savings, that also isn't what it's about either. It's about combining two companies with complementary skills, complementary portfolios and complementary strengths. It will form one company with a common vision-growth and profitability achieved through drilling," he told investors and analysts, following the announcement. Under the agreement, UPR shareholders will receive 0.455 Anadarko common share per share of UPR. Anadarko shareholders will hold approximately 43% of the combined company, which will retain the Anadarko name. Based on Anadarko's March 31 closing price the merged company will have a more than $9 billion market capitalization. And the deal has an implied value to UPR shareholders of $17.60 per share, representing a 21% premium to the Fort Worth independent's March 31 closing price. Anadarko expects the merger to be treated as a tax-free reorganization and accounted for as a purchase. Credit Suisse First Boston advised Anadarko in the deal, while Simmons & Co. International and Goldman, Sachs & Co. advised UPR. "The new Anadarko creates a capital structure that will let us drill more wells and accelerate growth," said UPR's Lindahl. "We're a leader in drilling and technology. We have drilled more than 4,000 wells in the last five years. We specialize and have an excellent track record in applying exploitation technology and processes in both oil fields and low permiability gas fields. We have a terrific asset base and an unmatched land position, anchored by our Rocky Mountain land grant. We have strong cash flow, estimated north of $1.2 billion for 2000. But we also carried a lot of debt, although we have paid down more than $1.8 billion of it the last two years. So we have a lot of great prospects in our portfolio that we had to put on hold." -Nick Snow and Leslie Haines