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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
TO
SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT
UNDER SECTION 14(d)(4) OF THE
SECURITIES EXCHANGE ACT OF 1934
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PENNACO ENERGY, INC.
(NAME OF SUBJECT COMPANY)
PENNACO ENERGY, INC.
(NAME OF PERSONS FILING STATEMENT)
COMMON STOCK, $0.001 PAR VALUE
(Title of Class of Securities)
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708046107
(CUSIP Number of Class of Securities)
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PAUL M. RADY
PENNACO ENERGY, INC.
1050 17TH STREET, SUITE 700
DENVER, COLORADO 80265
(303) 629-6700
(Name, address and telephone number of person
authorized to receive notices and communications
on behalf of the persons filing statement)
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With copies to:
DAVID P. OELMAN, ESQ.
VINSON & ELKINS L.L.P.
2300 FIRST CITY TOWER
1001 FANNIN STREET
HOUSTON, TEXAS 77002
(713) 758-2222
[ ] Check the box if the filing relates solely to preliminary communications
made before the commencement of a tender offer.
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AMENDMENT NO. 2 TO SCHEDULE 14D-9
Pennaco Energy, Inc. (the "Company") hereby amends and supplements its
Solicitation/Recommendation Statement on Schedule 14D-9 originally filed with
the Securities and Exchange Commission on January 8, 2001 and amended and
supplemented by Amendment No. 1 thereto dated January 12, 2001 (as so amended
and supplemented, the "Schedule 14D-9"). The Schedule 14D-9 relates to an offer
by Marathon Oil Acquisition 1, Ltd., a Delaware corporation (the "Purchaser"),
which is a direct wholly owned subsidiary of Marathon Oil Company ("Marathon"),
an Ohio corporation, which is a direct wholly owned subsidiary of USX
Corporation, a Delaware corporation ("USX"), to purchase all of the outstanding
shares of common stock, par value $.001 per share (the "Common Stock"), of the
Company, together with the associated common share purchase rights issued
pursuant to the Rights Agreement dated as of February 24, 1999, as amended as of
December 22, 2000, between the Company and Computershare Investor Services,
L.L.C., as rights agent (collectively with the Common Stock, the "Shares"), at
$19.00 per Share, net to the seller in cash, without interest thereon, upon the
terms and subject to the conditions set forth in the Offer to Purchase, dated
January 8, 2000 (as amended and supplemented, the "Offer to Purchase"), and the
related Letter of Transmittal (which, together with any amendments or
supplements thereto, collectively constitute the "Offer"), copies of which were
filed as Exhibits (a)(1) and (a)(2), respectively, to the Schedule 14D-9.
Capitalized terms used and not defined herein shall have the meanings set
forth in the Schedule 14D-9.
ITEM 4. THE SOLICITATION OR RECOMMENDATION.
Item 4 of the Schedule 14D-9 is hereby amended and supplemented
by amending and restating subsection (b) Reasons -- Background of the
Offer to read in its entirety as follows:
Background of the Offer. From time to time, the Company has been the
subject of informal inquiries regarding a possible acquisition or other business
combination transaction. On September 8, 2000, Mr. Douglas E. Brooks,
Manager -- Business Development for the Rocky Mountain Region of Marathon, made
such an initial inquiry to Mr. Paul M. Rady, Chairman of the Board, President
and Chief Executive Officer of the Company. In response to the inquiry, the
Company provided representatives of Marathon with various materials containing
publicly available information about the Company's operations.
On November 8, 2000, Mr. Clarence P. Cazalot, President of Marathon,
contacted Mr. Rady to express Marathon's interest in acquiring the Company and
to explore business combination options. On November 10, 2000, Mr. Rady and Mr.
Glen C. Warren, Jr., Executive Vice President, Chief Financial Officer and
Director of the Company, met in Houston, Texas with Mr. Cazalot, Mr. Steven B.
Hinchman, Senior Vice President -- Operations of Marathon, and Mr. Richard J.
Murphy, Manager -- Mergers and Acquisitions of Marathon, to discuss a potential
acquisition transaction. The parties agreed to further explore a possible
transaction over the next 30 days. The Company agreed at that time to provide
Marathon with information concerning the Company's operations pursuant to the
terms of a confidentiality agreement dated as of November 15, 2000.
On November 16 and 17, 2000, representatives of Marathon met with members
of the Company's senior management team in Denver, Colorado for an initial due
diligence session. Throughout the latter half of November and the first half of
December 2000, Marathon conducted a due diligence review of the Company and its
operations.
As a result of the preliminary discussions with Marathon, as well as other
informal inquiries that had been received from time to time, the Company
determined in late November 2000 to interview several investment banking firms
in order to retain a financial advisor, which would assist the Company with any
potential transaction with Marathon, as well as any other inquiries that might
be received or solicited.
On December 8, 2000, Mr. Cazalot discussed with Mr. Rady Marathon's initial
valuation of the Company of $17.00 per Share. After receiving this initial
indication of interest, the Board held a special meeting on the same day to
discuss a potential transaction with Marathon. The Board was advised of
Marathon's indication of interest and the amount of its initial valuation and
determined that the valuation was
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not acceptable. However, the Board authorized the officers of the Company to
continue discussions with Marathon's representatives. Following this meeting,
Company representatives held additional discussions and provided additional due
diligence materials to Marathon's representatives. On December 14, 2000, the
Company's senior management was advised of a revised indication of interest from
Marathon at an increased offer price of $19.00 per Share. At a regularly
scheduled meeting of the Board held on the same date, the Board was advised of
this revised indication of interest and of the status of the continuing
discussions with Marathon. At this meeting, the Board authorized continued
discussions with representatives of Marathon, authorized the engagement of
Lehman Brothers Inc. ("Lehman Brothers") to act as its financial advisor with
respect to the proposed transaction and authorized the appropriate officers of
the Company to engage legal counsel.
On December 15, 2000, following continued negotiations between senior
representatives of Marathon and the Company, the representatives of the parties
reached a tentative agreement as to the principal economic terms of the
transaction, subject to finalizing Marathon's due diligence, negotiation of a
definitive agreement and the approval of each party's board of directors. The
Company directed its counsel to prepare an initial draft of the Merger
Agreement, which was circulated to Marathon and its representatives on December
18, 2000. Lehman Brothers conducted formal due diligence with the Company's
senior management in Denver, Colorado on December 18, 2000. Between December 18
and 22, 2000, representatives of Marathon conducted a further due diligence
review of the Company and its operations.
On December 19, 2000, the Board held a special meeting to again discuss the
terms of the proposed transaction. Representatives of Lehman Brothers were also
present at the meeting and described the role Lehman Brothers would play in
connection with the continued discussions with Marathon and the fairness
analysis Lehman Brothers would undertake to deliver. Representatives of the
Company's counsel were also present and described the legal issues surrounding a
proposed transaction, as well as the terms of the transaction contained in the
initial draft of the Merger Agreement that had been delivered to Marathon and
its legal counsel. The Board directed the appropriate officers of the Company,
assisted by Lehman Brothers, as well as Company counsel, to continue
negotiations with Marathon and its representatives. Following this meeting,
representatives of the Company and Marathon proceeded to negotiate, in detail,
the terms of the proposed transaction, including at meetings and conference
calls held December 20, 21 and 22, 2000.
On December 22, 2000, the Board held a special meeting to review and
discuss with the Company's management and legal and financial advisors the terms
of the proposed acquisition and the applicable agreements. At this meeting,
Lehman Brothers reviewed with the Board its financial analysis of the
consideration payable in the Offer and the Merger and rendered to the Board an
oral opinion (confirmed in writing) to the effect that, as of the date of the
opinion and based upon and subject to certain matters stated in such opinion,
the $19.00 per Share cash consideration to be received in the Offer and the
Merger by the Company's stockholders (other than the Company, the Purchaser and
Marathon) was fair, from a financial point of view, to such holders. Also at
this meeting, the Company's counsel, gave an update with respect to various
legal aspects of the transaction. At the conclusion of this meeting, the Board
unanimously approved the Offer, the Merger and the Merger Agreement, determined
that the Offer, the Merger and the Merger Agreement are advisable and fair to
and in the best interests of the Company's stockholders, and recommended that
the stockholders accept the Offer and tender their Shares pursuant thereto.
The Merger Agreement was thereafter finalized and executed after the
closing of trading on December 22, 2000, and a joint press release announcing
the proposed Offer and the Merger was issued by the Company and Marathon.
On December 27, 2000, the Company filed with the Securities and Exchange
Commission a Current Report on Form 8-K announcing that it had entered into the
Merger Agreement, which included as an exhibit a publicly available copy of the
Merger Agreement.
On January 8, 2001, the Purchaser commenced the Offer. Since commencement
of the Offer, neither the Company nor Lehman Brothers has received any inquiries
from other parties regarding a possible acquisition or other business
combination transaction.
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For additional information regarding the background of the Offer, please
read Section 11 of the Offer to Purchase, which is incorporated herein by
reference.
Item 4 is further amended and supplemented by adding the
following paragraphs to the end of subsection (b) Reasons:
Opinion of Financial Advisor. Lehman Brothers has acted as financial
advisor to the Company in connection with the proposed transaction. On December
22, 2000, Lehman Brothers rendered its opinion to the Board that as of such
date, from a financial point of view, the cash consideration of $19.00 per Share
to be offered by Marathon to the Company's stockholders in connection with the
proposed transaction was fair to such stockholders.
THE FULL TEXT OF LEHMAN BROTHERS' OPINION DATED DECEMBER 22, 2000 WAS
INCLUDED AS ANNEX B TO THE SCHEDULE 14D-9 ORIGINALLY FILED ON JANUARY 8, 2001
AND IS INCORPORATED HEREIN BY REFERENCE. HOLDERS OF THE COMPANY'S COMMON STOCK
MAY READ LEHMAN BROTHERS' OPINION FOR A DISCUSSION OF THE PROCEDURES FOLLOWED,
FACTORS CONSIDERED, ASSUMPTIONS MADE AND QUALIFICATIONS AND LIMITATIONS OF THE
REVIEW UNDERTAKEN BY LEHMAN BROTHERS IN CONNECTION WITH ITS OPINION.
LEHMAN BROTHERS' ADVISORY SERVICES AND OPINION WERE PROVIDED FOR THE
INFORMATION AND ASSISTANCE OF THE BOARD IN CONNECTION WITH ITS CONSIDERATION OF
THE PROPOSED TRANSACTION. LEHMAN BROTHERS' OPINION IS NOT A RECOMMENDATION TO
ANY STOCKHOLDER OF THE COMPANY AS TO WHETHER TO ACCEPT THE OFFER AND TENDER
THEIR SHARES PURSUANT TO THE OFFER. LEHMAN BROTHERS WAS NOT REQUESTED TO OPINE
AS TO, AND ITS OPINION DOES NOT ADDRESS, THE COMPANY'S UNDERLYING BUSINESS
DECISION TO PROCEED WITH OR EFFECT THE MERGER.
In arriving at its opinion, Lehman Brothers reviewed, among other things:
- the Merger Agreement and the specific terms of the proposed transaction;
- publicly available information concerning the Company that Lehman
Brothers believed to be relevant to its analysis, including the Company's
Annual Report for the year ended December 31, 1999 and the Company's
Quarterly Report for the period ended September 30, 2000;
- a reserve report prepared by the Company detailing certain estimates of
proved reserves and future production, revenue, operating costs and
capital investment for the Company as of June 30, 2000;
- a schedule prepared by the Company's management of the Company's
estimated probable and possible reserves as of June 30, 2000;
- financial and operating information with respect to the business,
operations and prospects of the Company furnished to Lehman Brothers by
the Company, including financial projections for the Company for the
period from 2000 through 2005;
- a trading history of the Company's common stock from December 19, 1999 to
December 19, 2000 and a comparison of that trading history with those of
other companies that Lehman Brothers deemed relevant;
- a comparison of the historical financial results and present financial
condition of the Company with those of other companies that Lehman
Brothers deemed relevant;
- a comparison of the financial terms of the proposed transaction with the
financial terms of certain other oil and gas transactions that Lehman
Brothers deemed relevant; and
- a review of the Company's current liquidity position and short term
capital requirements with the management of the Company.
In addition, Lehman Brothers had discussions with the management of the
Company concerning the Company's business, operations, assets, financial
condition, prospects, reserves, production profile and exploration programs and
undertook such other studies, analyses and investigations that Lehman Brothers
deemed appropriate.
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In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by Lehman
Brothers without assuming any responsibility for independent verification of
such information and further relied upon the assurances of management of the
Company that they are not aware of any facts or circumstances that would make
such information inaccurate or misleading. With respect to the financial
projections of the Company and the estimates of future production, revenue,
operating costs and capital investment for the Company, each as prepared by the
Company, upon advice of the Company, Lehman Brothers assumed that such
projections and estimates were reasonably prepared on a basis reflecting the
best currently available estimates and judgments of the Company's management as
to the future performance of the Company, and that the Company will perform
substantially in accordance with such projections and estimates. However, for
purposes of its analysis, Lehman Brothers also considered certain somewhat more
conservative assumptions which resulted in certain adjustments to the
projections and estimates of the Company. Lehman Brothers discussed these
adjusted projections and estimates with the management of the Company and the
Company's management agreed with the appropriateness of the use of such adjusted
projections and estimates by Lehman Brothers in performing its analysis. In
arriving at its opinion, Lehman Brothers did not conduct a physical inspection
of the properties and facilities of the Company and did not make or obtain any
evaluations or appraisals of the assets or liabilities of the Company. In
addition, the Board did not authorize Lehman Brothers to solicit, and Lehman
Brothers has not solicited, any indications of interest from any third parties
with respect to the purchase of all or a part of the Company's business. Lehman
Brothers' opinion necessarily was based upon market, economic and other
conditions as they existed on, and could be evaluated as of, December 22, 2000.
No limitations were imposed by the Company on the scope of Lehman Brothers'
investigation or the procedures to be followed by Lehman Brothers in rendering
its opinion. In connection with rendering its opinion, Lehman Brothers performed
certain financial, comparative and other analyses as described below. In
arriving at its opinion, Lehman Brothers did not ascribe a specific range of
value to the Company, but rather made its determination as to the fairness, from
a financial point of view, of the cash consideration of $19.00 per Share to be
offered to the Company's stockholders in the proposed transaction on the basis
of the analysis described below. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial and comparative analysis and the application of those methods to the
particular circumstances, and, therefore, such an opinion is not readily
susceptible to summary description. Furthermore, in arriving at its fairness
opinion, Lehman Brothers did not attribute any particular weight to any analysis
or factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Lehman
Brothers believes that its analyses must be considered as a whole and that
considering any portion of such analyses and the factors considered, without
considering all analyses and factors, could create a misleading or incomplete
view of the process underlying the opinion. In its analyses, Lehman Brothers
made numerous assumptions with respect to industry performance, general business
and economic conditions and other matters, many of which are beyond the control
of the Company. Any estimates contained in the analyses are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than as set forth in the analyses. In
addition, analyses relating to the value of businesses do not purport to be
appraisals or to reflect the prices at which businesses could actually be sold.
Valuation Analysis
Lehman Brothers performed a valuation of the Company using the following
methodologies: net asset valuation analysis, comparable companies analysis and
comparable transactions analysis. Each of these methodologies was used to
generate a reference enterprise value range for the Company. The enterprise
value range was adjusted for appropriate on and off balance sheet assets and
liabilities to arrive at an equity value range (in aggregate dollars). The
equity value range was divided by fully diluted shares outstanding which is
comprised of primary shares, outstanding options and outstanding warrants. The
per share equity value ranges were then compared to the $19.00 per Share cash
consideration to be offered to the Company's stockholders in the Offer. The
implied per share equity values derived using the various valuation
methodologies described above supported the conclusion that the consideration to
be received by the Company's stockholders was fair, from a financial point of
view, to such stockholders.
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The various valuation methodologies noted above and the implied per share
equity values derived therefrom are included in the following table. This table
should be read together with the more detailed descriptions set forth below. The
table alone does not constitute a complete description of the financial and
comparative analyses. Considering the implied per share equity values without
considering the narrative description of the financial analyses, including the
assumptions underlying these analyses, could create a misleading or incomplete
view of the process underlying, and conclusions represented by, Lehman Brothers'
opinion.
SUMMARY DESCRIPTION OF VALUATION
VALUATION METHODOLOGY METHODOLOGY IMPLIED EQUITY VALUE PER SHARE
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NET ASSET VALUATION ANALYSIS..... Net present valuation of
after-tax cash flows generated by
proved reserves using selected
hydrocarbon pricing scenarios and
discount rates plus evaluation of
probable reserves and other
assets and liabilities
-- Case I Gas Prices $ 6.27-$ 8.31
-- Case II Gas Prices $12.14-$15.24
-- Case III Gas Prices $15.14-$18.89
COMPARABLE COMPANIES ANALYSIS.... Market valuation benchmark based
on the common stock trading
multiples of selected comparable
companies for selected financial
and asset-based measures
excluding incorporation of a
control premium $13.21-$17.44
Comparable companies valuation
analysis incorporating a 15%
control premium $15.19-$20.06
COMPARABLE TRANSACTIONS
ANALYSIS....................... Market valuation benchmark based
on consideration paid in selected $ 8.98-$11.10
comparable transactions
CONSIDERATION TO BE RECEIVED BY
THE COMPANY'S STOCKHOLDERS IN
THE OFFER...................... $19.00
Net Asset Valuation Analysis. Lehman Brothers estimated the present value
of the future after-tax cash flows expected to be generated from the Company's
proved reserves as of January 1, 2001 based on estimated reserves, production
cost estimates and a range of discount rates and assuming a tax rate of 38%, all
as provided by the Company's management and discussed with the Company's
management. Lehman Brothers added to such estimated values for proved reserves
assessments of the value of certain other assets and liabilities of the Company,
including probable and possible reserves and other land and acreage. Identified
probable and possible reserves were assessed based on the results of the
evaluation of proved undeveloped reserves with certain additional adjustments to
reflect the risk profile of the probable and possible reserves. Additional land
and acreage was assessed using a range of multiples as determined by Lehman
Brothers through discussions with the Company's management. The net asset
valuation analysis was performed under three natural gas price scenarios (Case
I, Case II and Case III) which are described below.
The natural gas price forecasts employed by Lehman Brothers were based on
New York Mercantile Exchange ("NYMEX") price forecasts (Henry Hub, Louisiana
delivery) from which adjustments were made to reflect location and quality
differentials. NYMEX gas price quotations are stated in heating value
equivalents per million British Thermal Units ("MMBtu"), which are adjusted to
reflect the value per
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thousand cubic feet ("MCF") of gas. The table below presents a summary of
natural gas price forecasts employed by Lehman Brothers for each pricing case.
ESCALATION PRICE COST
HENRY HUB ($/MMBTU) 2001E 2002E 2003E THEREAFTER CAP ESCALATION
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Case I.................................... $3.00 $2.90 $2.80 -- N.A --
Case II................................... $5.00 $4.15 $3.50 -- N.A --
Case III.................................. $6.07 $4.37 $3.86 1.5% $5.00 1.5%
Case I reflects an estimate developed by Lehman Brothers, in consultation
with the Company, of future natural gas prices which commercial banks and other
lenders might have considered, as of December 19, 2000, in determining borrowing
bases for exploration and production companies. Case II reflects the published
natural gas price forecasts employed as of December 19, 2000 by Lehman Brothers'
equity research department in developing earnings and cash flow estimates for
exploration and production companies for which they publish research. Case III
reflects, for each of the three years shown, forward-market prices as of
December 19, 2000 for natural gas. These prices were determined by averaging the
12 monthly NYMEX natural gas futures contracts for each of the three years. In
each of the price cases, adjustments are made to account for heating content of
the gas and costs related to gathering, processing and transportation.
The net asset valuation analysis resulted in implied per share equity
values of $6.27 to $8.31 for Case I; $12.14 to $15.24 for Case II; and $15.14 to
$18.89 for Case III. The consideration of $19.00 per Share to be received by the
Company's stockholders in the Offer exceeds the high end of this overall
valuation range.
Comparable Companies Analysis. Lehman Brothers reviewed the public stock
market trading multiples for selected exploration and production companies
including:
- Barrett Resources Corporation
- Burlington Resources Inc.
- Cross Timbers Oil Company
- EOG Resources, Inc.
- Evergreen Resources, Inc.
- HS Resources, Inc.
- Louis Dreyfus Natural Gas Corp.
- Prima Energy Corporation
- Tom Brown, Inc.
Using publicly available information, Lehman Brothers calculated and analyzed
the adjusted capitalization multiples of certain historical and projected
financial and operating criteria such as earnings before interest, taxes,
depreciation, depletion, amortization and exploration expenses ("EBITDE"),
proved reserves, net income and discretionary cash flow. The adjusted
capitalization of each company was obtained by adding its long-term debt to the
sum of the market value of the common equity, the value of its preferred stock
and the book value of any minority interest, minus cash balance. The appropriate
projected 2000, 2001 and 2002 EBITDE multiple ranges were determined to be 6.0x
to 7.0x, 4.5x to 5.5x, and 4.0x to 5.0x, respectively. Proved reserve multiple
ranges were determined to be $1.50 to $1.70 per thousand cubic feet of gas
equivalent ("Mcfe"); the multiples were applied to the Company's management's
internal reserve estimates as of July 1, 2000. The appropriate projected 2000,
2001 and 2002 net income multiple ranges were determined to be 15.0x to 18.0x,
10.0x to 12.0x, and 9.0x to 11.0x, respectively. The appropriate projected 2000,
2001 and 2002 discretionary cash flow multiple ranges were determined to be 5.5x
to 6.5x, 4.0x to 5.0x, and 3.5x to 4.5x, respectively.
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This methodology yielded valuations for the Company that implied a per
share equity value range of $13.21 to $17.44. Additionally, a control premium
was applied to reflect potential additional per share value of owning a majority
interest in the equity of the Company. This control premium was estimated to be
15%. This methodology yielded valuations for the Company that implied a per
share equity value range of $15.19 to $20.06. The cash consideration of $19.00
per Share to be offered to the Company's stockholders in the Offer falls within
this range.
Because of the inherent differences between the corporate structure,
businesses, operations and prospects of the Company and the corporate structure,
businesses, operations and prospects of the companies included in the comparable
company groups, Lehman Brothers believed that it was inappropriate to, and
therefore did not, rely solely on the quantitative results of the analysis and,
accordingly, also made qualitative judgments concerning differences between the
financial and operating characteristics of the Company and the companies in the
comparable company group that would affect the public trading values of the
Company and such comparable companies.
Comparable Transactions Analysis. Lehman Brothers reviewed certain
publicly available information on selected transactions which were announced or
took place from May 1998 to November 2000 including, but not limited to:
- Calpine Corporation/TriGas Exploration Inc.
- Apache Corporation/Fletcher Challenge Ltd.
- Apache Corporation/Phillips Petroleum Company
- Tom Brown, Inc./Stellarton Energy Corporation
- Pogo Producing Company/North Central Oil Corp.
- Stone Energy Corporation/Basin Exploration, Inc.
- The Meridian Resource Corporation/Shell Oil Company
- Forest Oil Corporation/Forcenergy Inc.
- Chesapeake Energy Corporation/Gothic Energy Corporation
- Devon Energy Corporation/Santa Fe Snyder Corporation
- BP Amoco Corporation/Vastar Resources, Inc.
- AEC Oil & Gas/McMurry Oil Company
- Louis Dreyfus Natural Gas Corp./Costilla Energy, Inc.
- Anadarko Petroleum Corporation/Union Pacific Resources Group Inc.
- Prize Energy Corp./Vista Energy Resources, Inc.
- St. Mary Land & Exploration Company/King Ranch Energy
- Devon Energy Corporation/PennzEnergy Company
- Cross Timbers Oil Company/Spring Holding Co.
- Santa Fe Energy Resources, Inc./Snyder Oil Corporation
- Ocean Energy, Inc./Seagull Energy Corporation
- Kerr-McGee Corporation/Oryx Energy Company
- Pogo Producing Company/Arch Petroleum, Inc.
- Lomak Petroleum, Inc./Domain Energy Corporation
- Atlantic Richfield Company/Union Texas Petroleum Holdings, Inc.
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For each transaction, relevant transaction multiples were analyzed including:
total purchase price (equity purchase price plus assumed obligations) divided by
latest twelve month ("LTM") EBITDE; total purchase price divided by proved oil
and natural gas reserves on an Mcfe basis; total purchase price divided by
estimated current net production; and equity purchase price divided by the LTM
discretionary cash flow. The appropriate LTM EBITDE multiple range was
determined to be 7.5x to 8.5x. The appropriate proved reserve multiple range was
determined to be $1.40 to $2.00 per Mcfe. The appropriate net daily production
multiple range was determined to be $4.75 to $5.25 per MMcf/d. The appropriate
LTM discretionary cash flow multiple range was determined to be 7.0x and 8.0x.
This methodology yielded valuations for the Company that implied per share
equity values ranging from $8.98 to $11.10. The consideration of $19.00 per
Share to be offered to the Company's stockholders in the Offer exceeds the high
end of this valuation range.
Because the market conditions, rationale and circumstances surrounding each
of the transactions analyzed were specific to each transaction and because of
the inherent differences between the businesses, operations and prospects of the
Company and the acquired businesses analyzed, Lehman Brothers believed that it
was inappropriate to, and therefore did not, rely solely on the quantitative
results of the analysis and, accordingly, also made qualitative judgments
concerning differences between the characteristics of each of these transactions
and the transactions contemplated by the Merger Agreement involving the Company.
E&P Transaction Premiums Analysis
Lehman Brothers reviewed certain publicly available information related to
selected exploration and production corporate transactions to calculate the
amount of the premiums paid by the acquirers to the acquired company's
stockholders. Transactions analyzed included, but were not limited to:
- Tom Brown, Inc./Stellarton Energy Corporation
- Amerada Hess/Lasmo
- Stone Energy Corporation/Basin Exploration, Inc.
- Devon Energy Corporation/Santa Fe Snyder Corporation
- Anadarko Petroleum Corporation/Union Pacific Resources Group Inc.
- Devon Energy Corporation/Pennzenergy Company
- Santa Fe Energy Resources, Inc./Snyder Oil Corporation
- Ocean Energy, Inc./Seagull Energy Corporation
- Kerr-McGee Corporation/Oryx Energy Company
- Pogo Producing Company/Arch Petroleum, Inc.
- Atlantic Richfield Company/Union Texas Petroleum Holdings, Inc.
- Ocean Energy, Inc./United Meridian Corporation
- Chesapeake Energy Corporation/Hugoton Energy Corporation
- Pioneer Natural Resources Company/Chauvco Resources, Ltd.
- Texaco Inc./Monterey Resources, Inc.
- Burlington Resources Inc./Louisiana Land & Exploration Company
- Louis Dreyfus Natural Gas Corp./American Exploration Company
- Parker & Parsley Petroleum Company/Mesa Inc.
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Lehman Brothers calculated the premiums paid by the acquirer by comparing the
per share purchase price in each transaction to the historical stock price of
the acquired company as of one day, one week and one month prior to the
announcement date. Lehman Brothers compared the premiums paid in the precedent
transactions to the premium levels implied by the $19.00 cash consideration to
be offered to the Company's stockholders in the Offer. The table below sets
forth the summary results of the analysis:
PERCENTAGE PREMIUM TO THE
PRICE AS OF DAY(S) PRIOR TO
TRANSACTION ANNOUNCEMENT
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SELECTED TRANSACTIONS 1-DAY 1-WEEK 4-WEEKS
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Mean........................................................ 16.3% 19.3% 24.5%
Median...................................................... 14.9% 17.6% 22.3%
PREMIUM TO BE RECEIVED BY THE COMPANY'S STOCKHOLDERS IN THE
OFFER (PREMIUMS CALCULATED AS OF DECEMBER 19TH)........... 24.6% 34.5% 50.5%
Additionally, Lehman Brothers advised the Board that the $19.00 offer was a
premium of 9.4% to the Company's all-time closing high and 7.0% to the Company's
all-time intra-day high.
Lehman Brothers is an internationally recognized investment banking firm
engaged in, among other things, the valuation of businesses and their securities
in connection with mergers and acquisitions, negotiated underwritings,
competitive bids, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. The Company
selected Lehman Brothers because of its expertise, reputation and familiarity
with the Company and because its investment banking professionals have
substantial experience in transactions comparable to those which are
contemplated by the Merger Agreement involving the Company.
Lehman Brothers has acted as financial advisor to the Company in connection
with the transactions contemplated by the Merger Agreement and will receive a
fee for its services which is contingent upon the consummation of the proposed
transaction. In addition, the Company has agreed to indemnify Lehman Brothers
for certain liabilities that may arise out of the rendering of its engagement.
Lehman Brothers has also performed various investment banking services for
Marathon and USX in the past and has received customary fees for such services.
In the ordinary course of its business, Lehman Brothers actively trades in the
securities of the Company and Marathon for its own account and for the accounts
of its customers and, accordingly, may at any time hold a long or short position
in such securities.
ITEM 9. EXHIBITS.
Item 9 of the Schedule 14D-9 is hereby amended and supplemented by adding
thereto the following:
*(a)(10) Letter to Stockholders of the Company, dated January 26, 2001.
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* Included in materials delivered to stockholders of the Company.
9
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SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
PENNACO ENERGY, INC.
By: /s/ PAUL M. RADY
----------------------------------
Name: Paul M. Rady
Title: Chairman of the Board,
President and Chief
Executive Officer
January 26, 2001
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INDEX OF EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- -----------
+*(a)(1) -- Offer to Purchase, dated January 8, 2001.
+*(a)(2) -- Letter of Transmittal.
++*(a)(3) -- Letter to stockholders of the Company, dated January 8,
2001.
(a)(4) -- Joint Press Release issued by the Company and Marathon on
December 22, 2000 (incorporated by reference to the
Company's Preliminary Communication on Schedule 14D-9-C
filed December 26, 2000).
+(a)(5) -- Form of Summary Advertisement, dated January 8, 2001.
+++(a)(6) -- Complaint filed by Harry Levy in the District Court, City
and County of Denver, Colorado, on January 5, 2001.
+++(a)(7) -- Complaint filed by Richard Stearns in the District Court,
City and County of Denver, Colorado, on January 5, 2001.
+++(a)(8) -- Complaint filed by John Grillo in the Court of Chancery
of the State of Delaware in and for New Castle County on
January 9, 2001, together with related Motion for
Preliminary Injunction and Motion for Expedited
Proceedings filed on January 10, 2001.
+++(a)(9) -- Complaint filed by Thomas Turberg in the Court of
Chancery of the State of Delaware in and for New Castle
County on January 9, 2001.
*(a)(10) -- Letter to stockholders of the Company, dated January 26,
2001.
(e)(1) -- Agreement and Plan of Merger, dated as of December 22,
2000, by and among the Company, the Purchaser and
Marathon (incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed December 27,
2000).
++*(e)(2) -- Opinion of Lehman Brothers Inc., dated December 22, 2000
(included as Annex B).
++(e)(3) -- First Amendment, effective as of November 15, 2000, to
the Employment Agreement dated July 2, 1998 between
Pennaco Energy, Inc. and Paul M. Rady.
++(e)(4) -- First Amendment, effective as of November 15, 2000, to
the Employment Agreement dated July 2, 1998 between
Pennaco Energy, Inc. and Glen C. Warren, Jr.
++(e)(5) -- Employment Agreement dated July 28, 2000 between Pennaco
Energy, Inc. and Gregory V. Gibson.
++(e)(6) -- Employment Agreement dated July 28, 2000 between Pennaco
Energy, Inc. and Terrell A. Dobkins.
++(e)(7) -- Employment Agreement dated July 28, 2000 between Pennaco
Energy, Inc. and Brian A. Kuhn.
++(e)(8) -- Form of Parachute Tax Agreement, effective as of November
15, 2000.
++(e)(9) -- Form of Letter Agreement Re: Purchase of Stock Options.
- ---------------
+ Filed as an exhibit to the Purchaser's Tender Offer Statement on Schedule
TO, dated January 8, 2001, and incorporated herein by reference.
++ Filed with the Schedule 14D-9 on January 8, 2001.
+++ Filed as an exhibit to Amendment No. 1 to the Purchaser's Tender Offer
Statement on Schedule TO, dated January 12, 2001, and incorporated herein by
reference.
* Included in materials delivered to stockholders of the Company.