Cimarex Energy Co. will not have any debt when it is formed in the spin-off of Helmerich & Payne Inc.'s exploration and production assets later this year. Upon its all-stock purchase of Key Production Co. Inc., Denver, soon after, it will acquire Key's $34 million of debt, for an estimated debt-to-market-cap ratio of 5.6%, and reserves of 392 billion cubic feet of gas equivalent. Subash Chandra, E&P analyst for Morgan Keegan & Co. Inc., Houston, says the deal "makes sense on many levels." He credits Key chairman and chief executive officer Mick Merelli, who will be the new company's chairman and CEO. Chandra says Merelli "has been focal to every significant acquisition Key has ever made-and the company is better than most in squeezing value out of a deal." Other E&P companies that have relatively little or no debt, according to John S. Herold Inc., Norwalk, Connecticut, include Spinnaker Exploration, St. Mary Land & Exploration, Penn Virginia, Prima Energy, Unit Corp., Equity Oil, Berry Petroleum, Stone Energy, Tom Brown Inc., PanCanadian Energy and Houston Exploration Co. Merelli was named, in a conference call about the deal, as a reason why H&P chose Key after meeting many candidates. Tulsa-based H&P had been looking for a while to do something with its E&P assets, to make itself a pure-play contract-drilling company, and had retained investment-banking firm Petrie Parkman & Co. as its guide. In the deal, Petrie Parkman advised H&P; Merrill Lynch advised Key. Key itself was a spin-off-of Apache Corp., Houston, in 1988 and went public in 1992. Merelli was president and chief operating officer from 1988-91 of Apache, which is no stranger to successful acquisitions. He joined Key in 1992 and has been a director of Apache since 1997. Key has successfully grown its reserves during the years-it had 38 billion cubic feet of gas equivalent (Bcfe), or 3,600 cubic feet equivalent per share, in 1992 and finished 2001 at 147.3 Bcfe. But growth was daunting last year: year-end reserves were down from 153.9 Bcfe at year-end 2000. That Key was unable in 2001 to replace reserves-the results were 75% with revisions and 93% without-was disappointing to investors and analysts. Chandra says, "Missteps in the Gulf Coast drilling program were largely to blame." After purchasing Key, Cimarex will have 392 Bcfe of proven reserves, 78% gas and 98% proved developed producing, with a reserve-to-production ratio of 5.7 years. Production will be 190 million cubic feet of gas equivalent per day, 64% in the Midcontinent, 23% in West Texas and 13% from the Gulf Coast. "The spin-off...should be excellent for [H&P] shareholders as each [business] segment should receive a higher multiple as pure plays...," says Lewis Kreps, oil-service analyst at Frost Securities Inc., Dallas. The new company's "clean balance sheet" will allow it to pursue acquisitions, he adds. He values H&P at $33 per share and Cimarex at $8, post-split from H&P but pre-purchase of Key. H&P was trading at $30 before the announcement ($36 at press time); Key, at $15 ($17 at press time). The remainder of H&P will retain assets worth $1.2 billion, including 116 land rigs (58 in the U.S., 33 in South America and 25 under construction) and 12 platform rigs (10 in the Gulf of Mexico and two under construction). The company has $50 million of debt. Doug Fears, H&P vice president, finance, says any debt Cimarex may have upon its purchase of Key, outside of Key's existing $34 million, would be if Cimarex or Key chose to incur some for normal capex or other expenses. None of it will be debt that once belonged to H&P, Fears says. Merelli says, "Cimarex will be able to hit the ground running. We intend to profitably grow Cimarex's proved reserves and production through a balanced mix of exploration, exploitation and acquisitions." Cimarex's drilling managers won't experience new problems with getting rigs when they want them, however: according to H&P's exploration personnel, they already have to place an order for a rig and bid with the rest of the industry's drilling managers. For more on this deal, see "Company Briefs" in this issue. -Nissa Darbonne, Managing Editor