In the natural gas business, Key Production ( KP) may be about to unlock future investment profits. This small-cap exploration and production company -- with a market cap of $228 million and average daily volume of less than 50,000 shares -- may seem like one of many withering small-cap energy companies hoping to be acquired or get lucky like the Clampetts. However, Key is in the process of completing a merger with major potential.
The merged entities -- which will take the name Cimarex -- will create a pure-play land-based exploration and production company with about 392 Bcf of reserves and 185 million cubic feet of production per day. The company's reserves will be about 78% natural gas. The new company should have a market cap of about $700 million and only $34 million in debt. H&P shareholder will own about 65% of the company with Key shareholders owning the balance, receiving one share of Cimarex for each share of Key.
the merger will be a suitable investment for the institutional investor," said Korus. I expect the merger to be a catalyst for additional interest in the new Cimarex.
Introducing CimarexKey came public in 1992 with a market cap of just $25 million, reserves of just 38 billion cubic feet, or Bcf, of natural gas and annual production of just 8.3 Bcf. Ten years later the company has grown -- now holding nearly 147 Bcf of reserves and producing 26 Bcf of natural gas -- but has remained a relatively tiny player in the North American natural gas business. Enter Helmerich & Payne ( HP), an oil and gas contract drilling company. Over the years H&P also accumulated a number of exploration and production projects, all land-based, from Kansas to the Gulf coast. However, when H&P made a strategic decision in the past year to refocus on its core contract drilling business, the E&P assets went up for sale. And Key jumped on it.
A Good FitWhile Key could have kept growing through its own development program, opportunities for transformational mergers are few and far between. The marriage between Key and H&P to create Cimarex is a good example. "This is a good fit as there is really no overlap between the two companies," said Paul Korus, Key's Chief Financial Officer at an oil and gas conference in Denver on Monday. "This is a great opportunity to blend two organizations and not lose any impact from redundancy." While both have exploration projects in the mid-Continent region all the way to the Louisiana Gulf coast, the overlap is minimal. In fact, Key's capital budget should go a long way to enhance the prospects for many of H&P's mid-Continent projects that had taken a backseat to Gulf-area projects. Korus noted the 2003 capital budget of the combined companies would focus more on promising projects in the mid-Continent region. While the combination provides a solid platform for long-term natural gas production growth, an immediate benefit to existing Key shareholders could come from the impact of the increase in size of the company. Key's lack of mass and liquidity has kept many institutional investors away, even though the assets have been attractive. Increasing the market cap and the liquidity of the common stock should help attract a more diverse investor base.
|At a Glance |
Key Production (HE:NYSE)
|52-week Range||$21.97 - $10.85|
|Market Cap||$228.1 million|
|Avg. Daily Volume||49,863|
|*Based on 2002 Estimates |
Source: Market Guide, FirstCall, Company Reports