Pioneer Natural Resources Co., Dallas, (NYSE: PXD) will buy Evergreen Resources Inc., Denver, (NYSE: EVG) in a deal worth $2.1 billion. Pioneer will retain Evergreen's Denver offices as its base of operations in the Rockies, a new core area for the company. The company is paying $1.40 per thousand cu. ft. equivalent for Evergreen's proved reserves-low compared with Kerr-McGee's offer for Westport Resources and EnCana's offer for Tom Brown. Scott D. Sheffield, Pioneer chairman and chief executive, says the purchase price was fair on a cash-flow basis. He estimates Pioneer is paying 7.5 times cash flow for Evergreen., whereas Kerr-McGee will pay 4.5 times cash flow for Westport, and EnCana will pay seven times cash flow for Tom Brown. Mark Sexton, Evergreen chairman and chief executive, says Evergreen has long struggled to receive a proper valuation for its reserves from the market-it's 32-year reserve life is "too much of a good thing." He anticipates the sale to Pioneer will allow Evergreen's shareholders to receive a better valuation going forward. Through this acquisition, Pioneer is using a portion of the returns from its deepwater Gulf of Mexico exploration program to reinvest in long-lived North America assets and low-risk development drilling locations, Sheffield says. The purchase of Evergreen will increase Pioneer's proved reserves by approximately one-third-essentially all North American gas. Evergreen's year-end proved reserves of approximately 1,495 billion cu. ft. of gas equivalent are in two Rockies basins-Raton (94%) and Piceance/Uintah (4%)-and in southern Canada (2%). The fields contain an additional 890 billion cu. ft. equivalent of identified probable natural gas reserves, mostly in the Rockies. Full-cycle finding and development costs, including the acquisition cost and future development costs to convert proved undeveloped and probable reserves to proved developed producing reserves, is expected to be approximately $1.22 per thousand cu. ft. equivalent. The transaction adds more than 2,000 low-risk onshore U.S. drilling locations and at least eight years of low-risk production growth. "Evergreen's focused strategy and quality long-lived properties in the Rockies will establish the ideal new core area for Pioneer, in line with our strategy of building a stable foundation with excess cash flow to invest in high-return opportunities," Sheffield says. Pioneer's production may grow to up to 73 million BOE after closing, and another 10% to 15% in 2005, he adds. Evergreen currently produces 150 million cu. ft. of gas equivalent per day and expects to average about 160 million per day during 2004. Production from Evergreen's assets is expected to double by 2008. Andrew Lees, an analyst with RBC Capital Markets, says that while Pioneer appears to be paying a reasonable price for Evergreen, "the strategic rationale is, on the surface, confusing." Pioneer already boasts one of the longest reserve-to-production ratios among its peers, and it is on the cusp of generating large amounts of free cash flow from recent major development, Lees said. The real payoff of the deal will come in the future, he says. "We believe Pioneer is positioning itself for significant future capital outlays on major projects in Alaska, Argentina, Gabon, Tunisia and Iraq, and adding low-risk development opportunities to counterbalance these higher-risk prospects," Lees says. "In that light, the deal begins to make sense. We believe Pioneer is opportunistically buying tomorrow's free cash at a reasonable price today, and simultaneously lowering its risk profile through diversification." Analysts at Friedman Billings Ramsey say Evergreen's low-risk assets will rebalance Pioneer's risk profile and expect it will take time for investors to accept the strategic benefits of the transaction. "We believe that appropriate credit should/will only be given to this initiative after Pioneer demonstrates that these assets are worth at least as much in its own hands as in Evergreen's hands, and that more-stable cash flow will indeed enable the company to more effectively execute an exploration program."