Driller Helmerich & Payne Inc., Tulsa, (NYSE: HP) will spin off its exploration and production division as Cimarex Energy Co., which will buy Denver independent Key Production Co. Inc. (NYSE: KP), all in tax-free stock transactions. The new company is expected to have an equity market value of approximately $600 million. Proved reserves will total 392 billion cu. ft. of gas equivalent, 78% gas and 98% proved developed. 2002 production will be approximately 190 million cu. ft. of gas equivalent per day. "I think it's excellent for the [H&P] shareholders to get the more pure-play multiples they should achieve rather than being a conglomeration of two different parts of the energy segment," says Lewis Kreps, an oil-service analyst with Frost Securities Inc., Dallas. "Helmerich & Payne has a long history in the business and I think this is the right thing for it to do." Shareholders like the deal too. The day it was announced, shares of both H&P and Key rose. In the spin-off, H&P shareholders will receive approximately 0.53 share of Cimarex per share of H&P. Then, Key shareholders will receive one share of Cimarex per each share of Key they hold. H&P shareholders will own 65.25% of Cimarex. Hans Helmerich, H&P chief executive officer, says, "H&P shareholders will now have additional flexibility in their holdings: shares of a pure-play drilling company and shares of an oil and gas enterprise, both with management teams that will be able to focus exclusively on their respective businesses." Key will be part of a larger company with a gas-oriented asset base and the financial backing to be a top competitor. "Because of our asset overlap, our low debt and our common business philosophies, Cimarex will be able to hit the ground running," says Mick Merelli, Key chairman and CEO. "We intend to profitably grow Cimarex's proved reserves and production through a balanced mix of exploration, exploitation and acquisitions." Merelli will be chairman and CEO of Cimarex. Steve Shaw, H&P vice president of E&P, will be Cimarex executive vice president. The remainder of the executive team will include three representatives from H&P and four from Key. Corporate headquarters will be in Denver. Operations will be out of Tulsa. The board will consist of nine members: five named by H&P and four by Key. Petrie Parkman & Co. was financial advisor to H&P; Merrill Lynch was advisor to Key. Subash Chandra, E&P analyst for Morgan Keegan & Co., Houston, praised Merelli's reputation and work at Key, in a research note about the Cimarex deal. "The H&P transaction makes sense on many levels, and credit must go to Merelli...who has been focal to every significant acquisition Key has ever made-and the company is better than most in squeezing value out of a deal," he says. He adds that Merelli was noted in the conference call about the deal as to why H&P chose Key, after meeting with many candidates. Cimarex will be spun off with no debt from H&P. Key has $34 million of debt. The combined company's debt-to-market-capitalization ratio is expected to be about 5%. Bob Gillon, who covers Key for John S. Herold Inc. in Norwalk, Conn., says Cimarex's growth will come mainly from the drillbit, rather than acquisitions. "They'll look at acquisitions, but on both sides, their expertise has been in drilling wells," Gillon says. "And even though they're positioned to do a fairly sizeable purchase, that would be a little bit surprising. It's kind of against the nature of both cultures." -Jodi Wetuski