EXHIBIT (a)(5)
[HIBERNIA SOUTHCOAST CAPITAL LOGO]
March 16, 2002
The Board of Directors
Esenjay Exploration, Inc.
500 N. Water Street, Suite 1100
Corpus Christi, TX 77002
Gentlemen:
The Board of Directors of Esenjay Exploration, Inc. ("Esenjay" or the
"Company") has asked Hibernia Southcoast Capital, Inc. ("Southcoast", "we",
"us", or "our") to advise it with respect to the fairness, from a financial
point of view, of a proposed transaction (the "Transaction") involving the total
consideration to be received by the holders of Esenjay's common stock (the
"Common Stock") through a tender offer by Santos Americas and Europe Corporation
("Santos" or the "Offerer") as described in the Agreement among Santos Americas
and Europe Corporation, ECM Acquisition Company and Esenjay Exploration, Inc.
dated as of March 17, 2002 (the "Acquisition Agreement"), pursuant to which the
Offerer will make an offer (the "Offer") to purchase all the Common Stock
(including all common shares which may become outstanding on the exercise of
Company options) at a price of $2.84 in cash per share of Common Stock (the
"Consideration"), to be followed by a second step merger involving a de facto
assumption of liabilities of the Company for an aggregate total consideration of
approximately $80 million.
We understand also that:
i) the Acquisition Agreement requires Santos, as soon as practicable
after the date of the Acquisition Agreement and in any event
during the period of seven business days beginning on the day of
the first public announcement of the Acquisition Agreement, to
commence the Offer;
ii) Offeror's obligation to take and pay for common shares tendered
under the Offer will be subject to, among other things, there
being tendered and not withdrawn prior to the expiration of the
Offer not less than a majority of all outstanding Common Stock;
iii) the Acquisition Agreement further requires that the Board of
Directors, affiliated entities, and David B. Christofferson tender
and not withdraw all of their collective Common Stock representing
53% of the outstanding Common Shares; and
iv) the Acquisition Agreement requires that Michael E. Johnson,
Esenjay Petroleum Corporation, Alex M. Cranberg, Aspect Energy,
LLC (successor in interest to shares held previously by Aspect
Resources, LLC), and David W. Berry further agree as part of an
Option Agreement, to a non-compete agreement for a period of one
year from the date of the agreement which limits their individual
and collective ability to acquire interests directly or indirectly
in oil and gas properties within mutually agreed upon areas where
the Company has interests. The Option Agreement allows for the
Offeror to purchase all Common Stock owned by these parties at the
Offer price for a period 30 days following the termination of the
Offer.
HIBERNIA SOUTHCOAST CAPITAL'S ENGAGEMENT
The Board of Directors has requested that Southcoast provide our
opinion ("Opinion") as to the fairness, from a financial point of view, of the
Consideration to be offered to the shareholders of Esenjay pursuant to the
Offer. We will be paid a fee, plus reasonable out-of-pocket expenses, for
rendering our Opinion. The fee was negotiated by the parties and was not
contingent upon the consummation of the Transaction. The Company has agreed to
indemnify Southcoast in respect of certain liabilities that might arise out of
its engagement. We have not been engaged to prepare, and have not prepared a
formal valuation or appraisal of any of the assets, liabilities or equity
instruments of Esenjay and our Opinion should not be construed as such. However,
Southcoast conducted independent financial analyses, which we considered to be
appropriate and necessary to support the conclusions reached in this Opinion.
CREDENTIALS OF HIBERNIA SOUTHCOAST CAPITAL
Southcoast is a New Orleans-based equity boutique that provides a full
range of corporate finance services including mergers and acquisitions, capital
formation, institutional equity sales and trading, and investment research. The
firm specializes in a limited number of industry sectors including
telecommunications, specialty retail, leisure and gaming, and all facets of the
energy industry. The Opinion expressed herein is the opinion of Southcoast and
the form and content hereof have been approved for release by Hibernia
Southcoast Capital under the direction of the managing director of the corporate
finance department.
CORPORATE REVIEW AND ANALYSIS
In connection with rendering our Opinion, we have done the following
and reviewed and relied upon, among other things, the following information and
documents:
(i) the proposal letter dated February 26, 2002, from Santos USA Corp. to
Mr. Michael E. Johnson, President and Chief Executive Officer;
(ii) drafts of the Acquisition Agreement and the Shareholders' Agreement, by
and between Santos and Esenjay;
(iii) the audited financial statements, annual reports, 10-K filings, annual
information forms and proxy statements of Esenjay for the years ended
December 31, 1998, 1999 and 2000;
(iv) the unaudited financial statements of Esenjay for the quarters ended
March 31, 2001; June 30, 2001; September 30, 2001 and the preliminary
unaudited financial statements for the year ended December 31, 2001;
(v) Esenjay's preliminary reserve reports as prepared by Ryder Scott
Company dated February 19, 2002 and February 22, 2002, concerning the
Company's oil and natural gas interests effective December 31, 2001;
(vi) Esenjay's internal estimates of the incremental oil and natural gas
reserve value and growth potential in addition to the Ryder Scott
reserve estimates;
(vii) the detailed preliminary operating and capital budgets, production
forecast, revenue forecast, drilling schedule, and general and
administrative budget of the Company for 2002 as prepared by the
management of Esenjay;
(viii) the information memorandum dated October 2000 prepared by Randall and
Dewey to assist parties with their analysis in acquiring or merging
with the Company;
(ix) the strategic review of Esenjay prepared by Randall and Dewey for the
Board of Directors on February 27, 2002;
(x) certain publicly available information relating to the business,
operations, financial performance and stock trading history of Esenjay
and other selected public oil and gas companies considered to be
relevant;
(xi) certain internal financial, operational, legal, corporate and other
information provided by Esenjay's management;
(xii) conducted discussions with members of senior management of Esenjay
concerning the historical, current and estimated financial position and
results of operations of its business;
(xiii) compared the results of operations of Esenjay with comparable public
companies;
(xiv) certain publicly available information concerning the nature and terms
of certain selected comparable transactions involving different
companies that we considered relevant to our inquiry; and
(xv) made such other financial studies, analyses and examinations, performed
such other investigations and took into account such other matters as
Southcoast deemed necessary or appropriate.
ASSUMPTIONS AND LIMITATIONS
In our review and analysis and in arriving at our Opinion, we have
relied upon, and assumed the completeness, accuracy and fair presentation of all
financial, oil and gas reserve estimates, and other information, data, advice,
opinions and representations obtained by us from public sources or provided to
us by Esenjay or advisors, or otherwise procured pursuant to our engagement, and
our Opinion is conditional upon such completeness, accuracy and fair
presentation. Subject to the exercise of professional judgement and except as
expressly described herein, we have not attempted to verify independently the
accuracy or completeness of any such information, data, advice, opinions and
representations. In addition, we did not conduct a physical inspection of any of
the oil and gas properties or other assets of Esenjay, nor did we obtain or
consider any independent evaluations or appraisals of such properties or assets
other than a review of the oil and gas reserve information prepared by Esenjay
and the oil and gas reserve information of Esenjay prepared by Ryder Scott upon
which we relied without further investigation. Senior management of Esenjay have
represented to us, in a letter dated March 13, 2002 (the "Agreement"), among
other things, that the information, data, opinions and other material (the
"Information") provided to us by or on behalf of Esenjay are complete and
correct on the date the Information was so provided.
Our Opinion is based upon conditions in the securities markets, the oil
and natural gas markets, and the general economic and financial conditions
prevailing as the date hereof, and the financial condition and prospects of
Esenjay as they were reflected in the information and documents reviewed by us
and as they were represented to us in our discussions with management of Esenjay
and its advisors, auditors and consultants. The Opinion is given as of the date
hereof and Southcoast disclaims any
undertaking or obligation to advise any person of any change in any fact or any
matter affecting the Opinion which may come or be brought to the attention of
Southcoast after the date hereof. Without limiting the foregoing, in the event
that there is any material change in any fact or matter affecting the Opinion
after the date hereof, Southcoast reserves the right to change, modify or
withdraw the Opinion. In our analyses and in connection with the preparation of
this Opinion, we made numerous assumptions with respect to industry performance,
general business, market and economic conditions and other matters, many of
which are beyond the control of any party involved in the Offer.
This Opinion is for the information of and the sole benefit of the
Board of Directors only in considering the terms of the proposed Transaction.
Our Opinion is not to be construed as a recommendation to any shareholder of the
Company as to whether to tender Common Stock in acceptance of the Offer. Our
Opinion may not be relied upon, quoted or referred to in whole or in part by any
other person, except that in the event of reproduction of the Opinion in any
proxy statement or registration statement prepared in connection with the
proposed Transaction, Esenjay may also include references to the Opinion and to
Southcoast and its relationships with Esenjay (in each case in such form as
Southcoast reasonably shall approve) in such documents. Esenjay also may refer
to the Opinion in other public disclosures concerning the Transaction; provided
that, to the extent reference is made to Southcoast's Opinion, such form of
disclosure shall be first approved by Southcoast unless such disclosure only
references the existence of a fairness opinion without naming Southcoast or the
matters expressly contained in such fairness opinion. Other than as contemplated
above, neither the Opinion, nor any other opinion or advice (written or oral) of
Southcoast shall be used, reproduced, disseminated, quoted or referred to at any
time, in any manner or for any purpose, nor shall public reference be made to
Southcoast, except with Southcoast's prior written consent.
RATIONALE
In connection with the evaluation of the Transaction, Southcoast has
performed an analysis of Esenjay based upon: (I) selected recent oil and gas
property and company transactions that are comparable to Esenjay's assets and
(II) the public market valuations of comparable exploration and production
companies within the Southcoast coverage list.
In case I, we used selected comparable recent property and company
transactions from the Southcoast exploration and production mergers and
acquisitions database. For transactions that occurred during the year 2001, the
average purchase price per thousand cubic feet of equivalent proved reserves
(Mcfe) was $1.17. By extracting relevant comparable transactions for reserve
location and size that have occurred since mid-2001, the mean purchase price per
Mcfe of proved reserves increased to $1.72. This compares to the $80 million
offer for Esenjay, which suggests $4.37 per Mcfe of proved reserves. This
valuation is significantly higher than the highest acquisition price of $2.55
per Mcfe.
In case II, a $2.84 cash offer per share valuation of Esenjay's assets
implies a common stock price-to-net asset value per share of 178% based on
Southcoast's published estimated year-end 2001 net asset value of $1.60 per
share and 105% of Southcoast's published estimated year-end 2002 net asset value
of $2.70 per share. As of the March 15, 2002, the date of Southcoast's latest
published industry numbers, the average price-to-net asset value of the
Southcoast coverage list was 109% and 94% of year-end 2001 and year-end 2002 net
asset value per share, respectively.
Because the reasons for, and circumstances surrounding each of the
selected comparable transactions that Southcoast deemed relevant were so
diverse, and because of the inherent differences between the businesses,
operations and corporate structures of Esenjay and each of the selected
companies involved in such comparable transactions, Southcoast believes that a
purely quantitative
comparable transaction analysis would not be particularly meaningful in the
context of the Transaction. Southcoast believes that an appropriate use of a
comparable transaction analysis in this instance would involve qualitative
judgments concerning differences between the characteristics of these
transactions and those of the Transaction, which judgments are reflected in
Southcoast's opinion.
CONCLUSION
Based upon and subject to the foregoing and such other matters as we
considered relevant, Hibernia Southcoast Capital is of the opinion that, as of
the date hereof, the Consideration to be received pursuant to the Offer is fair,
from a financial point of view, to the shareholders of Esenjay.
Very truly yours,
Hibernia Southcoast Capital, Inc.
By: /s/ STANLEY E. ELLINGTON, JR.
------------------------------
Stanley E. Ellington, Jr.
Managing Director