Occidental Petroleum Corp., Los Angeles, (NSYE: OXY) plans to acquire Vintage Petroleum Inc., Tulsa, (NYSE:VPI) for $20 in cash per Vintage share and 0.42 of an Occidental share for each Vintage share, giving the total purchase a value of approximately $3.8 billion. This represents a 33% premium over Vintage's closing share price of $38.59 on October 13. At year-end 2004, Vintage reported proved reserves of 437 million barrels of oil equivalent and 421 million BOE of probable and possible reserves. The deal consideration equates to $8.79 per proved BOE at year-end 2004. Approximately 50% of Vintage's proved reserves are in Argentina; 32% are in the U.S. During second-quarter 2005, Vintage's total production averaged 76,000 BOE per day. Occidental will incorporate Vintage's California assets into its operations in the San Joaquin and Sacramento valleys. It will also integrate Vintage's Latin American assets into its existing position in Latin America, where it is one of the largest producers in Colombia and Ecuador. Oxy's Middle East position will be enhanced by that of Vintage in Yemen, where it has reported a string of good wells recently. "Vintage's mix of domestic and international assets is complementary to Occidental's existing portfolio of domestic and international opportunities and enhances the competitive ability of the combined company," says Charles C. Stephenson Jr., Vintage chairman and chief executive. "In addition, the structure of this transaction allows Vintage shareholders to realize immediate and potentially continuing value through the blend of cash and stock." Ray R. Irani, chairman, president and chief executive of Occidental, says, "Vintage Petroleum is an excellent strategic fit for Oxy, adding to our core areas in California, the Middle East and Latin America. On a per-share basis, we expect the acquisition to be immediately accretive to cash flow, free cash flow and earnings. We hope to double Vintage's production from Argentina within five years, as well as increase production from California by up to 20% over the next few years." The transaction is expected to close in first-quarter 2006. Credit Suisse First Boston LLC and Lehman Brothers Inc. are financial advisors to Vintage, while Petrie Parkman & Co. advised Occidental. Analyst Paul Sankey with Deutsche Bank Equity Research calls the transaction "Vintage champagne, water for Oxy. "Vintage shareholders must be delighted to hear that Oxy is offering some $51.49 a share for a stock that traded at $38.59," he said. Sankey also notes that, according to Wood Mackenzie, the production in Argentina, which provides much of the value in this transaction, is 92% water cut. "Oxy plans to increase production at rates of 10%-15%, which concurs with the WoodMac view of the field, but on valuation we need closer to $50 oil to make the deal look fair on NAV," Sankey says. Sankey puts Occidental's price target under negative review due to new Argentinian exposure. John P. Herrlin, an analyst with Merrill Lynch, views this transaction as "more of a buy/sell acquisition in which Oxy bolsters its position in California and other areas in the US (maintaining about 60% US production exposure), while adding Argentina as a new core area, and more modestly, adding to its Yemen properties, where Oxy already gets 5% of its current output (as of second-quarter 2005)." Herrlin's recommendation is to maintain a Buy rating on Occidental. "Admittedly, we're surprised that Oxy would opt to buy Vintage now, but Vintage is a company whose stock has recently dropped 16.5% from its 52-week high. It's an atypical U.S.-based E&P by being mainly a foreign-producing asset company," Herrlin says. "Vintage's management has been focused at reinvigorating Street interest in the company because it did feel underappreciated after a series of North American missteps. So, this becomes a validating transaction for the Vintage management team."