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Bloomberg: Statoil to Buy Hydro’s Energy Unit to Boost Reserves (Update4)

By Bunny Nooryani

Dec. 18 (Bloomberg) — Statoil ASA, Norway’s state- controlled oil company, agreed to buy Norsk Hydro ASA’s energy business for about $28 billion as supplies from domestic fields peak and competition intensifies for drilling contracts from Russia to Venezuela.

The combined group will control about 70 percent of production in Norway, the world’s third-biggest crude exporter, as prices stay above $60 a barrel. A bigger Statoil will be better placed to compete with BP Plc, Royal Dutch Shell Plc and OAO Gazprom for reserves.

“We’re getting a large Norwegian oil company that will be more competitive,” said Tom Rathke, finance director of Vital Forsikring ASA in Oslo, which manages about $9.6 billion in stocks, including 13 million Hydro shares and 7.3 million Statoil shares. “This is very good for the shareholders.”

Owners of Hydro will get 0.8622 of a share in the new company for each Hydro share, the companies said today at a presentation. They will also keep ownership of Hydro’s aluminum company, the fourth largest producer in the world. Statoil shareholders will keep their holdings in the new company on a one-for-one basis.

`Strong International Player’

Hydro shares today surged as much as 26 percent to 196.5 kroner, trading at 193 kroner at 2:11 p.m. local time. Shares of Statoil, 71 percent owned by the state, rose 1.9 percent to 176.25 kroner.

“From a strategic and international point of view, it makes sense,” said Bjoern Inge Toennessen, an analyst at DnB NOR Markets in Oslo, where he has a “buy” recommendation for both companies. “They become a strong international player.”
Eivind Reiten, 53, the current chief executive officer of Norsk Hydro, will become chairman of the combined company. Statoil’s current head, Helge Lund, 44, was proposed as CEO and president.

Statoil and Hydro are seeking new oil and gas deposits abroad to make up for a decline in production at aging North Sea fields. The companies have spent about $6 billion buying assets in the Gulf of Mexico in the past two years.

The combined entity would have oil and gas production of 1.9 million barrels a day in 2007 and reserves of 6.3 billion barrels of oil equivalent, the companies said.
Cost Per Barrel

That compares with 2005 production of 4.01 million barrels a day for BP, 3.38 million barrels a day for Shell and 2.49 million for France’s Total SA, Western Europe’s top three producers, according to data compiled by Bloomberg.

Statoil and Hydro have both cut production targets twice for this year, partly as a scarcity of drilling rigs and offshore services set back development of some fields. Oil prices have more than doubled in the past three years, spurring producers to spend more on exploration and production.

Norway gets about a fifth of its gross domestic product and about 61 percent of its exports from the oil and gas industry, according to Norway’s statistics office.
Statoil is paying about $13.70 per barrel for Norsk Hydro’s 2.05 billion barrels of oil equivalent, according to Bloomberg calculations. A year ago, ConocoPhillips paid $18 a barrel for Burlington Resources Inc. in a $35.6 billion accord. “The industry faces an increasingly challenging international landscape,” a statement from the companies said.

Morgan Stanley advised Statoil on the transaction, with Goldman Sachs Group Inc. working for Norsk Hydro.

Spurred by Shtokman

Shares of Statoil and Norsk Hydro have outperformed competitors in the past five years, returning an annual average of 30 percent and 22 percent, respectively. Exxon Mobil Corp., the world’s biggest company by market value, returned about 18 percent per year in the period.

Mergers and acquisitions in the oil and gas industry have climbed to a record this year as companies seek to add to reserves. The value of transactions this year is about $284 billion this year, according to data compiled by Bloomberg. That’s up from about $273 billion in 2005.

The cost of credit-default swaps based on 10 million euros ($13.1 million) of Statoil debt rose 2.9 percent to 8,750 euros, according to data compiled by Bloomberg.
Credit-default swaps are financial instruments based on corporate bonds and loans that are used to speculate on a company’s ability to repay debt. A price decrease indicates an improvement in credit quality; an increase a deterioration.

A merger has been speculated before. The CEOs of both companies held talks about an “industrial structure” in early 2004, concluding there was no reason to proceed.

Statoil Control

A failure by both companies to obtain stakes in Gazprom’s Shtokman gas development in October may have triggered today’s merger plan, said John Olaisen, an analyst at Carnegie ASA in Oslo. Statoil and Hydro were on a shortlist of companies competing to develop the deposit until Gazprom rejected foreign partners as an option. The Russian company has since said it may again consider international participation.

“If Hydro had got a large stake in Shtokman, then I don’t think this merger would have happened,” Olaisen said in an interview.

Shareholders of Statoil will hold 67.3 percent of the new company, with Hydro’s owners holding 32.7 percent. The Norwegian government will own about 62.5 percent.

“The government sees the recommended merger as industrially and strategically well founded,” Norwegian Prime Minister Jens Stoltenberg said in a statement. “The merger is an excellent foundation for meeting the challenges facing the oil and gas industry.”

The government aims to raise its stake in the new company to 67 percent “over time” and will ask for permission from parliament, it said.

The proposed merger must be approved by the companies’ shareholders and by regulatory authorities, the statement said. The merger is expected to be completed in the third quarter of 2007.

To contact the reporter on this story: Bunny Nooryani in Oslo at [email protected]t
Last Updated: December 18, 2006 08:13 EST

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