- El Paso Sees Great Value in Spinning Off E&P Unit
Wednesday, May 25, 2011
Houston Chronicle
by Tom Fowler
Natural gas pipeline giant El Paso Corp. will spin off its growing exploration and production business into a stand-alone public company, a move that has long been anticipated by analysts and investors.
The new company would be a midsize E&P company with significant acreage in a number of shale plays, including the Haynesville gas shales in Louisiana, the Eagle Ford and Wolfcamp oil shales in Texas and Utah's Altamont oil shales.
Following the spinoff, El Paso Corp. will be a natural gas pipeline business with more than 43,000 miles of pipe, midstream processing business and general and limited partner interests in El Paso Pipeline Partners, a public master limited partnership that owns some of the pipeline assets.
The as-yet-unnamed company will be Houston-based with about $4.7 billion in assets. The current head of El Paso Exploration and Production, Brent Smolik, will be CEO. The tax-free spinoff is expected to be completed by year's end.
"We believe that the creation of these two stand-alone public companies will result in significant and sustainable value creation," said Doug Foshee, chairman and chief executive officer of El Paso.
Also on Tuesday, El Paso raised its full-year earnings outlook from the 90-cent to $1.05-per-share range to a range of $1 to $1.10 per share, based largely on its improving E&P business. The 2011 exploration and production budget has also been increased by $300 million to $1.6 billion in order to step up activity on the oil-rich Eagle Ford shale in South Texas.
El Paso was one of several companies that tried its hand at the merchant energy business model in the 1990s -- owning and operating a wide range of assets from pipelines to power plants to energy trading businesses. With the collapse of the biggest of the energy merchants in late 2001, Enron Corp., many of the other companies fell on hard times and had to sell off assets and exit businesses.
In 2003, El Paso went from being involved in around 20 different industries to just two: pipelines and E&P, Foshee said.
"We got down to our core and thought we could be good and competent managers of those two businesses," he said.
Rebuilding came first
The E&P business was tough shape, however, he said, the company as a whole was saddled with a lot of debt and the pipeline business was about to embark on nearly $8 billion in expansion projects.
The idea of a spinoff of the E&P business has been considered for quite some time, but the unit needed to first rebuild itself and the corporation to strengthen its balance sheet, Foshee said in an interview.
The turnaround for E&P between 2007 and the end of 2010 has been strong. From about 3.7 trillion cubic feet equivalent of reserves in 2007, El Paso now has about 8 tcf equivalent, due largely to the unconventional shale plays. Reserve replacement costs have declined from $3.55 per mcf equivalent in 2007 to $1.40 at the end of 2010.
In 2007, 38 percent of the company's reserves were considered oil, but by the end of 2010 it was 48 percent. More than two-thirds of future growth prospects are in the oil area, the company said.
El Paso's exploration business has operations in Brazil and Egypt and some shallow-water Gulf of Mexico holdings, but the bulk of its efforts are focused on onshore unconventional oil and gas.
The company became active in the Haynesville in 2007 when it acquired leases through the acquisition of People's Energy. The company perfected its drilling and production techniques in the Haynesville, driving down costs significantly.
El Paso acquired 138,000 acres in the Wolfcamp play in West Texas and has seven years to assess and develop the field. In the Eagle Ford, El Paso has 170,000 net acres, with about 60 percent of them in areas considered rich with more valuable oil and natural gas liquids.
In Utah's Altamont field, El Paso has about 193,000 net acres. It plans to use enhanced oil recovery techniques, like CO2 injection and infill drilling, to boost production in the coming years.
Shares in El Paso closed up Tuesday $1.24, or almost 7 percent, at $20.22.
Analysts not unanimous
Analysts are not of one mind on an El Paso split. In a research note this week, Tudor Pickering Holt & Co. said it believed the company would be better off focusing on creating cash flow to continue to reduce debt for the next few years before doing a spinoff that would generate relatively little cash.
But Pearce Hammond, director for E&P research for Simmons & Co., said it's a sensible move that will appeal to shareholders.
"I would think they would pick up a number of investors who didn't want a piece of the pipeline business," Hammond said.
El Paso's focus on oil production growth makes sense given how much more oil is getting on the market compared to natural gas, Hammond said.
"But gas will have its day in the sun again," he said. "There seems to be a lot more demand for natural gas in the U.S. in the next decade than for oil."
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