M&A

2 November, 2009

UPDATE 1-Denbury to sell $500 mln in assets in Encore deal

* Denbury shares fall 10.7 pct, Encore shares up 21 pct

* Analysts say deal premium is rich (Recasts, adds executives' comments)

NEW YORK/HOUSTON, Nov 2 (Reuters) - Denbury Resources Inc (DNR.N) expects to sell off about $500 million in assets to pay down debt from its planned purchase of Encore Acquisition Co (EAC.N), its chief executive said on Monday.

Denbury said on Sunday it would buy Encore for $3.2 billion, creating a company with 426 million barrels of oil equivalent in proved reserves, on par with companies such as Range Resources Corp (RRC.N) and Forest Oil Corp (FST.N).

Still, the 35 percent premium to be paid for Encore, based on Friday's closing price, as well as the $2.3 billion in debt that Denbury would take on with the purchase appeared to worry investors, who pushed Denbury shares down 11.1 percent to $12.98. Encore shares jumped 20.6 percent to $44.70.

The companies said the acquisition would allow Denbury to leverage its enhanced-oil-recovery business into Encore's properties in Wyoming, Montana, and North Dakota, and would give it a large stake in the Bakken shale on the U.S.-Canada border.

Denbury is an industry leader in producing carbon dioxide and injecting it into older oil wells to help pump out difficult-to-reach oil.

About 75 percent of the company's production of nearly 100,000 barrels of oil equivalent per day would come in crude oil, and Denbury Chief Executive Officer Phil Rykhoek said the Encore fields could allow it to add between 1.3 billion and 3.2 billion barrels of oil in future reserves.

Based on 2008 year-end reserves and using the deal value including debt, Denbury is paying about $3.78 per proved thousand cubic feet equivalent of natural gas, and $17,143 per million cubic feet equivalent on a daily production basis, according to an estimate from KeyBanc Capital Markets.

"While the price tag appears too rich on a proved basis, clearly the company is also paying for the unproved resources upside," KeyBanc said in a note to clients.

Denbury will likely issue about 130 million shares to help pay for the acquisition, Rykhoek said, and should see its cash flow per share increase next year by 8 percent to 18 percent because of the acquisition.

Rykhoek did not identify which assets would be put on the block but said Denbury's properties in the Permian Basin of West Texas were considered "noncore." (Reporting by Matt Daily in New York and Anna Driver in Houston; editing by John Wallace and Gerald E. McCormick)

Source: http://www.reuters.com