Terms of the transaction call for Seagull to buy the larger Ocean for $1.1 billion in stock. Based on Tuesday's closing prices, the deal would value Ocean Energy at $10.81 per share, just over its closing price of $10.25 on the New York Stock Exchange.

The new entity, which will be named Ocean Energy and be based in Houston, will have a market capitalisation of $1.8 billion and proved reserves of about 500 million barrels of oil. Both companies are now based in Houston.

The union follows a series of consolidations in the sector, where companies have joined forces to combat low commodity prices and high costs of doing business. Stocks of both Seagull and Ocean have been hit hard by weak oil markets and have been cited as possible takeover targets.

Under thetransaction, which was approved Tuesday by both boards of directors, shareholders of Ocean Energy will receive one newly-issued share of Seagull for each share owned.

Seagull shares closed on Tuesday at $10.81 on the New York Stock Exchange.

Ocean Energy shareholders will own 61.5 percent of the new company and 38.5 percent will be owned by Seagull holders.

Seagull has a market capitalisation of $700 million and 63 million shares outstanding. Ocean Energy has a market capitalisation of $1.1 billion and 100 million shares outstanding.

The combined company anticipates some $100 million in asset sales next year.

Ocean Energy President and Chief executive James Flores will be chairman of the new company. Seagull President and Chief Executive James Hackett will hold the same titles at the new company.

"With the combined company's size, scale and scope, we'll be better positioned than either Ocean Energy or Seagull was on a stand-alone basis, to weather and leverage commodity prices and to beopportunistic regardless of the commodity environment," Hackett said.

The executives said they plan to cut capital spending by about 15 percent to $600 million next year as they combine the companies. The deal is expected to close in March.

"We're going to be try to be as conservative as possible with capital in the first quarter so we won't start accelerating the capital spending until the second quarter. At the same point in time, we want to be very cognizant of what commodity prices do going forward," Hackett said.

The board of directors of the new company will be made up of eight members of the Ocean board and seven from the Seagull board.

The two companies started negotiating a transaction in October when the top executives met at an industry conference, Hackett said. The two executives also said they had held talks with other companies about possible unions.

Ocean bought United Meridian Corp. earlier this year.

The companies said they expect $45 million in annual cost savings from thedeal.