By Jeffrey McCracken and Ben Casselman
Of THE WALL STREET JOURNAL
Oil and gas exploration firm SandRidge Energy Inc. (SD) is acquiring west Texas rival Arena Resources Inc. (ARD) for $1.6 billion, a deal that shifts SandRidge further into conventional oil-field assets amid a continued fall in natural gas prices.
SandRidge will pay Arena shareholders $2.50 in cash and 4.77 shares of stock for each Arena share, which values Arena at $40 per share. That is a 17% premium from its Friday close of $34.26.
(This story and related background material will be available on The Wall Street Journal Web site, WSJ.com.)
The acquisition is a significant deal for Oklahoma City-based SandRidge, which has a market cap around $1.6 billion and until recently focused almost entirely on natural gas.
CEO Tom Ward said that in late 2008, he concluded gas prices were likely to stay low for years and began looking for oil assets. In September, the company made a bid to buy bankrupt oil producer Crusader Energy Group Inc., in a deal that ultimately fell apart, and in December, SandRidge paid $800 million for West Texas oil assets owned by Forest Oil Corp.
"Starting in late 2008, we felt it would be a hard couple years for natural gas," said Ward.
"I never know how the market will react. We have tried to be clear on our strategy. We believe the market is more prepared for a move to oil today than ever before," he said.
SandRidge and Arena began discussing the deal in January, according to the companies. Ward will stay on as CEO. Arena's management and board will have no role in the future company.
Ward said the move to oil is a matter of economics: Natural gas prices have fallen 27% so far this year, to $4.086 per million British thermal units, and many experts expect low prices to last through 2010. Oil prices, meanwhile, have rebounded to above $80 a barrel, from under $35 a barrel in December 2008.
"It's a transformation from a natural gas company to a more balanced portfolio," Ward said. "The economics of natural gas just aren't as good today as they were a few years ago."
Other companies are making a similar shift. In recent years, companies such as EOG Resources Inc. (EOG), Petrohawk Energy Corp. (HK) and Chesapeake Energy Corp. (CHK) focused mostly on natural gas, using new technologies to tap huge new gas fields in Texas, Louisiana and Pennsylvania.
But gas from the new fields glutted the market just as the recession cut into demand for all forms of energy. Now many of those companies are emphasizing oil instead of gas.
Chesapeake Energy Chairman and CEO Aubrey McClendon, the industry's most outspoken advocate for natural gas, has recently had a change of heart. "The economics just compel you to look for oil rather than natural gas right now," McClendon said at an industry conference in Fort Worth. "We feel like we have enough [natural gas] to last us the rest of our lives."
Ward, who co-founded Chesapeake with McClendon before joining SandRidge in 2006, is taking a different approach than his former colleagues. Chesapeake and other big U.S. energy companies focus on producing oil and gas from dense rock formations called shales, which hold huge volumes of hydrocarbons but are expensive to tap.
SandRidge instead looks for more traditional oil and gas reserves that often produce smaller amounts of oil but are much cheaper to drill. Ward said Arena's wells can cost under $500,000 to drill, compared to millions for many shale wells.
"If you start spending $5 million to $6 million per well, you're asking each well to produce an unusually large amount of oil and gas," Ward said.
-By Jeffrey McCracken and Ben Casselman, The Wall Street Journal; email@example.com