In an all-stock deal to be closed during the third quarter, Devon Energy Corp. and Santa Fe Snyder Corp. will merge. The new company will have a pro forma enterprise value of approximately $9 billion, 2000 estimated cash flow of $11 per share, total proved reserves of approximately 1.1 billion barrels of oil equivalent, and annual production of 115- to 125 million BOE. The deal combines the 11th- and 15th-largest U.S. independents, based on rankings in Petroleum Finance Week's 1999 Independent Producers' Scoreboard. Devon, the surviving entity, will continue to be based in Oklahoma City under president and chief executive officer J. Larry Nichols. Santa Fe Snyder CEO James L. Payne will become vice chairman. Santa Fe Snyder's Houston office will handle most of the international and offshore operations. This marks the third huge transaction Devon has made since its purchase of Calgary's Northstar Energy Corp. in December 1998. That deal bumped up reserves by more than 70% and vaulted the company into a new core area, the Western Canadian Sedimentary Basin. Then in August 1999, the company acquired PennzEnergy, more than doubling its size by adding almost 400 million BOE of reserves, including some in Azerbaijan's world-class ACG Field. Devon's growth was attracting investor attention even before this latest deal was announced: the average daily trading volume of its common stock (Amex: DVN) grew five-fold in 1999. The company has often traded at a premium to its peer group. Wall Street E&P analysts reacted favorably to the new $3.4-billion merger once they had the opportunity to examine it upon their return from the Memorial Day weekend. "I like the match-up," says David M. Khani of Friedman Billings & Ramsey in Arlington, Virginia. "Devon gets some inclining production growth, exploration upside and fairly good operating personnel that it needed. Santa Fe Snyder gets a better balance sheet, a well-run ship and slightly higher-grade management with financial discipline. The combination of Devon's strong balance sheet and Santa Fe Snyder's assets creates a case where one plus one equals two-and-a-half." Shannon L. Nome, who follows both of the producers for Banc of America Securities LLC in Houston, promptly raised her target price for DVN to $68 per share from $65 because of the acquisition's accretive aspects. "The deal appears to be a wash on an asset-value basis, but our model suggests 9% is accretive to estimated 2001 discretionary cash flow per share and more than 50% is accretive to estimated 2001 earnings per share," she says. "The bottom line is that the merger creates a well-managed, top five 'super-independent,' armed with a bulletproof balance sheet, balanced commodity-price exposure and an improved growth outlook." It's a good deal for the Devon shareholder, according to John Myers of Dain Rauscher Wessels in Austin. "It looks accretive by every measurement-earnings, cash flow and net asset value per share. The companies have a great geographic fit domestically. We also like Santa Fe Snyder's international operations." Roughly 75% of the new firm's reserves will reside in North America. It will also own assets in Azerbaijan and Venezuela from the Devon side, and Argentina, Brazil, Gabon, Cote d'Ivoire, Ghana, offshore Congo, the South China Sea and Indonesia from Santa Fe Snyder. Santa Fe Snyder's international production was projected to grow 20% through 2003 through projects already under way. Significant exploration upside remains in many of these regions, where in some cases Santa Fe Snyder owned as much as 100% interest. For some time, it had been trying to sell some of its interests in China and Africa. In the past year, Santa Fe Snyder's Payne said on several occasions large independents such as Devon or Santa Fe Snyder will have to increase their international exposure to grow, as U.S. plays mature. "I think Devon paid a fair price, without overpaying," says Wayne W. Andrews of Raymond James & Associates Inc. in Houston. "Ultimately, it's a gas-driven story that makes Devon more powerful in a region where it wanted to increase its presence: the U.S. Rockies." The new Devon's reserves will be 47% natural gas, and in North America, 58% gas. Both companies have strong positions in the coalbed methane plays in Colorado and Wyoming. Santa Fe Snyder had been frustrated in the last two years as it saw the stocks of its peer group rise while its own hovered between $8 and $10. Analysts say the company could benefit by becoming a part of Devon. "Devon was a high-multiple company that bought one that was getting no multiple for its earnings and cash flow," says Robert O. Christensen of First Albany Corp. in New York. "Once it becomes a part of Devon, the earnings and cash flow associated with Santa Fe Snyder will be recognized." "Santa Fe Snyder has assets that Devon's management team will catch more value from," adds Larry Benedetto, E&P analyst with Howard, Weil, Labouisse, Friedrichs Inc. in New Orleans. "Its stock wasn't showing the assets' real value." Two leading credit rating services reacted favorably to the deal. Moody's Investors Service affirmed its Baa2 assessment of Devon's senior unsecured debt and placed its Ba1 rating of Santa Fe Snyder's senior unsecured obligations under review for possible upgrade. Standard & Poor's Corp. placed its ratings of the two independents on watch with positive implications. "Although long-term debt to total capitalization will increase from around 35% to the low 40% range, Santa Fe Snyder's more rapidly producing reserves will boost cash flow protection measures," S&P said. Santa Fe Snyder shareholders will own approximately 32% of the combined company and Devon shareholders will own approximately 68%. Morgan Stanley Dean Witter advised Devon in the deal, while Chase Securities Inc. advised Santa Fe Snyder. Based upon preliminary estimates, the combined company's capital structure will consist of approximately 126 million common shares outstanding, $150 million in preferred securities, about $1.7 billion of net long-term debt and $400 million of other long-term liabilities. The $1.7 billion debt figure excludes certain Devon debt that is exchangeable into Chevron Corp. common stock. (Devon owns 7.1 million shares of Chevron common.) Devon's Nichols said as the merger was announced. "Both Devon and Santa Fe Snyder have been active with the drill bit, and both have been active acquirers and consolidators. Our larger platform should enhance both strategies." Analysts regard Devon's track record following its previous mergers as a key element of its impressive growth in the last year and a half. "Its execution and integration after each deal-specifically, getting costs cut and reducing staff-have been significant," Nome tells Oil and Gas Investor. "The business is littered with companies that grew too fast and paid for it later." Andrews says Devon has cut costs, increased production and acquired companies that were somewhat opportunity rich and cash poor each time that it has grown in this manner in the past. "Our only concern may be the pace at which Devon's been merging," he says. "But it has a good record of creating value for shareholders." "We definitely know that the bigger independents have performed better and traded at higher multiples than the small- to midcap companies," adds Benedetto. "There definitely will be more consolidation, although it won't be necessary for everybody to carry on. Nevertheless, bigger size brings more liquidity and room to operate."