General Statement of Beneficial Ownership — Schedule 13D
Filing Table of Contents
Document/Exhibit Description Pages Size
1: SC 13D Initial Filing on Schedule 13D 9 33K
2: EX-1 Joint Filing Agreement 1 6K
3: EX-2 Plan of Acquisition, Reorganization, Arrangement, 3 13K
Liquidation or Succession
EX-2 — Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession
| EX-2 | 1st Page of 3 | TOC | ↑Top | Previous | Next | ↓Bottom | Just 1st |
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Exhibit 2
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Third Point LLC
360 Madison Avenue, 24th Floor
New York, New York 10017
Tel (212) 224 7400 Fax (212) 224 7401
VIA FACSIMILE & U.S. MAIL
April 25, 2004
Mr. Peter A. Dea
Chief Executive Officer, President
Western Gas Resources, Inc.
1099 18th Street, Suite 1200
Denver, CO 80202
Dear Mr. Dea:
We are writing to inform you that certain entities managed by Third Point LLC
("Third Point") have acquired a 5.9% interest in Western Gas Resources, Inc.
(the "Company" or "Western"), bringing our holdings to 4,400,000 of the
outstanding shares. In addition, we have received early termination of the
Hart-Scott-Rodino waiting period based on our filing made on March 22, 2005.
In our view, the Company shares, currently at $34.55, trade at a significant
discount to the $48+ value estimated by several "street" analysts as well as our
own evaluation. We believe this discrepancy exists due to 1) complexity of the
Company's integrated asset base and 2) the perception that some exploration
projects are value destroying.
In light of the value gap that exists between the Company's market value and the
intrinsic value of its assets, the most obvious method to maximize shareholder
value is some sort of a monetization such as a spin-out or outright sale of the
Company's midstream assets, depending on which transaction would generate the
higher after-tax return to shareholders.
We understand the argument that the midstream assets are of competitive and
strategic value to the Company. Thus, we recommend that Western first explore a
structure whereby it retains operating control over these assets. For example,
several Master Limited Partnerships ("MLP"s) have been created whereby a General
Partner ("GP") interest and voting control was retained by the parent, and a
limited partner interest ("LP") was sold into the yield-hungry retail capital
markets where proceeds were used to either de-lever the parent's balance sheet
or repurchase the parent's shares. Our valuation work puts the value of the
midstream assets at somewhere between $1.6 and $2.2 billion depending on the
transaction considered. Your midstream assets are especially valuable given the
basins in which they operate and their growth prospects, indicated by the fact
that volumes gathered have increased from 1.2 to 1.4 Tcfe over the last two
years.
In our meeting April 19th, you mentioned that the Company has been studying and
discussing the concept of a spinoff of the midstream assets for "some time." We
believe that the time for talk has passed. We must insist that the Company
retain a reputable investment banking firm and promptly set forth a plan to
monetize the Company's midstream assets.
In the near term, we urge the Company to reconsider its capital spending plans,
limit the amount of capital spent on exploration and use any excess cash flow
generated from the midstream assets to repurchase shares. Assuming the Company
can obtain the appropriate "dewaterization" and drilling permits in the Powder
River Basin - the Company will have sufficient development projects in this
region to ensure growth in reserves.
We have not been encouraged by the recent run-up in finding & development costs.
According to a press release dated February 17, 2005, $91 million was spent on
exploration efforts that yielded 26 Bcfe of proved reserves resulting in a cost
of $3.46 per Mcfe. On the other hand, development and completion expenses, which
we support in full, yielded 165 Bcfe of proved reserves at a cost of $111
million, or $.67 per Mcfe. Thus the blended F&D cost metric of $1.05 is
misleading as it masks expensive and possibly uneconomic exploration activities.
According to 2005 Company guidance, the midstream assets should generate
approximately $100 million in cash flow after capital expenditures. This excess
cash flow should not be used to fund expensive exploration efforts but is better
spent on repurchasing stock or aggressively developing the Powder River Basin as
permits become available. We have no doubt that production from the Big George
will replace declines in the Wyodack once permits are issued and wells have time
to dewater - but this requires aggressive capital spending. $5 million wells in
the Pinedale Anticline that yield 7-10 Bcfe per well and $300,000 - $500,000
wells in the Big George that yield .5 Bcfe per well are sensible expenditures.
Exploration plays that cost $3.46 per Mcfe are not.
We are also mystified by the Company's recent entree into fiercely competitive
regions in Canada and the opening of a Calgary office. Our own study indicates
that most Canadian drilling inventory acreage is tied up. New entrants to the
region like Western will be hard pressed to compete with the low cost of capital
of income trusts and incumbent exploration companies that are valued as if they
will convert their corporate structures into income trusts. Furthermore, two
better capitalized US companies, Burlington Resources and Apache, already
operate in Canada. Were we in your shoes, we would only consider entering into
coal bed methane technology sharing agreements where a limited amount of capital
is put up by the Company.
Accordingly, we urge the Company to significantly curtail spending on
exploration and expansion into Canada and to use cash flow on lower cost, lower
risk development of existing inventory and the repurchase of shares.
In conclusion, we request that the Board of Directors formulate a plan to
address both of these strategic initiatives and report back to the shareholders.
We are hopeful that with
the Board's collective ownership of over 22% of the Company's shares it will act
in the best interest of the shareholders and will promptly initiate the
strategic measures we have recommended. Should the Board fail to take concrete
steps to close the value gap and maximize shareholder value, we may explore
other external alternatives through either a proxy solicitation process or by
soliciting bidders for the entire company.
Please do not misconstrue our recommendations as a condemnation of management or
the Company's Board of Directors. We have high regard for the Company's CEO and
respect for the members of the Board and their prior accomplishments in their
long and illustrious careers.
We are confident that your operating expertise combined with our understanding
of equity markets can create significant incremental value for all shareholders
in the near and long term. We look forward to hearing what specific steps the
Company will take in response to this letter.
Very truly yours,
Daniel S. Loeb
Chief Executive Officer
Dates Referenced Herein and Documents Incorporated by Reference
| Referenced-On Page |
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| This ‘SC 13D’ Filing | | Date | | First | | Last | | | Other Filings |
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| |  |
| Filed on: | | 4/25/05 |
| | 3/22/05 | | 1 |
| | 2/17/05 | | 2 | | | | | 8-K |
| | 4/25/04 | | 1 |
| List all Filings |
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