The combination of Plains Exploration & Production Co. and 3Tec Energy Corp. will create new core areas for Plains in East Texas and the Gulf Coast, and is expected to give the company a more balanced production and reserve profile. Following the acquisition, Houston-based Plains will have an enterprise value of more than $900 million. The companies anticipate completing the transaction in the second quarter of 2003. "3Tec's high-quality, natural gas-oriented properties bring more balance to our reserve base and production mix and diversity to our risk profile," says James C. Flores, chairman and chief executive officer of Plains. "Additionally, the recent exploration success 3Tec has had in South Louisiana is very exciting, and we believe its continuation will lead to substantial organic reserve and production growth." Flores believes the majors will be selling their mature Gulf Coast properties. "We have the skill set to take advantage of that trend," he says. 3Tec stockholders will receive $8.50 in cash and 0.85 share of Plains common stock per share of 3Tec common. Based on Plains' Jan. 31 closing price of $9.96 per share, this equates to $16.97 per 3Tec common share. The ratio is subject to adjustment should the market price of Plains' stock fall below $7.65 per share or rise above $12.35. The collar is to ensure that 3Tec stockholders receive $15 to $19 per 3Tec share. All told, Plains will pay $310 million to 3Tec shareholders ($151 million in Plains equity and $159 million cash), will pay $14.7 million cash to 3Tec preferred shareholders, pay $99 million in 3Tec bank debt, and fund roughly $12 million in transaction costs, according to Moody's Investors Service, which confirmed Plains' ratings. Based on a transaction value of approximately $432 million and $80 million of unproved properties, the proved reserve purchase price is $1.19 per thousand cu. ft. equivalent, according to Plains. 3Tec's long-lived gas reserves will help balance Plains' oil reserves in California, Flores says. Upon completion of the acquisition, Plains' production should increase more than 50%, with 37% of the production being gas. Its proved reserves will total 302 million BOE (19% gas). Post-closing, 3Tec stockholders will own about 40% of the combined company. Flores will remain chairman and CEO, and Plains' current executive staff will continue in their capacities. 3Tec will appoint two new members to the Plains board. The transaction will be accounted for as a purchase of 3Tec by Plains under purchase-accounting rules and Plains will continue to use the full-cost method of accounting for its oil and gas properties. Lehman Brothers was financial advisor to Plains, and Credit Suisse First Boston and Bear, Stearns & Co. advised 3Tec. Moody's noted that Plains' bank debt will rise by roughly $280 million. -Jodi Wetuski