Earlier today, Texas-based energy producer Cano Petroleum Inc. (CFW) announced its merger with independent oil and gas development and production company Resaca Exploitation Inc. in a tax-free stock-for-stock deal. The merged entity will operate under the Resaca name. The transaction is currently awaiting regulatory and shareholder approval and is expected to close within three to five months. The current stockholders of Cano will own approximately 50% of the combined company, with Resaca shareholders owning the rest. 

Under the terms of the agreement, Cano investors will exchange each of their shares for 2.1 shares of Resaca common stock. Based on Resaca’s pre-announcement closing price, the deal implies total consideration to Cano shareholders of $76 million or $1.67 per Cano share and $3.34 per proved barrel of oil equivalent. The merged entity will have its corporate offices in Houston, where Resaca is currently located (Cano is headquartered in Fort Worth, Texas). 

The combined group will have an estimated 63.2 million oil-equivalent barrels in proved reserves (81% oil), with a production capacity of 1,960 barrels of oil equivalent per day (BOE/d). 

We view the transaction as a good strategic fit in terms of mix of synergies and strengths. The ‘new’ Resaca will lead to the creation of a stronger energy franchise strengthened in complimentary oil-focused properties with balanced growth prospects. 

Fourth-Quarter Earnings 

Recently, Cano reported a weaker-than-expected fourth-quarter 2009 (three months ending June 30) loss, reflecting lower commodity prices. This was partially offset by higher production volumes. Loss per share came in at 36 cents, below the Zacks Consensus Estimate of 2 cents.
 
In the year-ago period, the recorded a loss of 50 cents per share (excluding discontinued operations). Revenue was down 49.3% year-over-year to $5.7 million. 

Healthy Volume Increase

Production during the quarter increased 15% year-over-year and 4% sequentially to 1,309 BOE/d. Average daily oil production was up 21% year-over-year, driven by increased volumes from the Cato Field. This was somewhat negated by reductions in natural gas sales, particularly at its Barnett Shale facility. 

Realized Prices Down 

Realized price for the quarter was $46.31 per barrels of oil equivalent (BOE), down 57.2% from the prior-year level. The average price realization of oil during the quarter fell 55.7% year-over-year to $52.57 per barrel, whereas average natural gas price realization was down approximately 65% to $5.02 per thousand cubic feet (Mcf). 

Capital Expenditure & Balance Sheet 

During the quarter, Cano spent $7.3 million on capital expenditures. As of Jun 30, 2009, the company had long-term debt of $55.7 billion, representing a debt-to-capitalization ratio of 27.3% versus 21.0% as on March 31, 2009.

Cano Petroleum, based in Fort Worth, Texas, acquires and exploits oil reserves. Their focus on domestic, mature oilfields eliminates exploration risks and uncertainties of international sources. Cano uses waterflooding and enhanced oil recovery techniques, including Alkaline-Surfactant-Polymer technology, which typically recover 16% to 25% of original oil in place. We currently rate Cano shares as Neutral.

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