In the industry's fifth multibillion-dollar move to acquire Rockies gas assets in the past year, Houston-based Noble Energy Inc. (NYSE: NBL) plans to acquire Patina Oil & Gas Corp. (NYSE: POG) for approximately $3.4 billion, including assumption of debt. The companies had combined year-end 2003 proved reserves of 710 million barrels of oil equivalent (55% domestic; 63% gas), daily production of approximately 61,400 bbl. of oil and 602 million cu. ft. of gas, and a reserve life of 12 years. Post-closing, Noble will have a concentrated core operating area on the Gulf Coast and in the deepwater Gulf of Mexico, and new core operating areas in the Rocky Mountain and Midcontinent regions. Following completion of the deal, Tom Edelman, Patina chairman and chief executive officer, and one other Patina board member will join Noble Energy's board. The deal is expected to close by April 2005. "While the addition of Patina's assets improves Noble's reserve profile on several metrics, the proposed financing will increase Noble's financial leverage significantly," says Standard & Poor's credit analyst Ben Tsocanos. "However, Standard & Poor's is concerned that the use of debt to partially fund the large premium being paid for Patina nearly doubles Noble's leverage on a per-BOE basis." Lloyd Byrne, an analyst with Morgan Stanley, asks if the transaction is accretive. "We think so. Using our expectations for production, operating costs and hedging, we find the deal to be 13% accretive to 2005 earnings per share and 15% accretive to 2006 EPS estimates. This is based on current hedges in place. If Noble hedges 75% of the transaction at today's prices, this raises the accretion to 19% and 22%, respectively." Does the deal add value? "The strategic fit makes sense," Byrne says. "The method of funding and hedges make it accretive to EPS. However, the price paid is steep, and based on our longer-term outlook for commodity pricing, [which is] $5 per thousand cu. ft. normalized, cost for PUD conversion and growth expectations, we find value accretion marginal." Brad Beago, an analyst with Calyon Securities (USA), has lowered his rating on Patina to Neutral from Add. "On a cash basis, we see little upside from the current level between now and completion of the deal. As both companies report fourth-quarter results and year-end reserves, we will have another opportunity to refine our valuation estimate." Petrie Parkman & Co. advised Patina. -Bertie Taylor