Dynegy revealed on June 24 a $2 billion capital scheme to shore up its liquidity and reduce its debt. The news follows close on the heels of the energy marketer's June 19 announcement that it would cut 340 workers, or 6%, from its worldwide workforce. Dynegy's staff in its headquarter city of Houston saw the heaviest cuts, with 300 employees let go, 50 of whom came from the firm's trading unit.
Also, Dynegy reported that it would be replacing its chief financial officer (see Personnel Moves and Promotions).
In other company news:
- Williams Cos. Inc. said it will offer for sale its refineries at Memphis and in Alaska and their related assets in a move that would effectively divest the company of all of its US refining capacity.
- Houston-based Marathon Oil Corp. closed on its offer to acquire Globex Energy Inc. of Houston in a deal valued at $155 million.
Dynegy's capital plan
Dynegy's plan includes the partial sale of its ownership interest in the 16,600 mile Northern Natural Gas Co. (NNG) pipeline system and of its ownership interest in Dynegy Storage in the UK-both acquired late in 2001-and the reduction by 50% of its common stock dividend starting in the third quarter. The company also plans to make an initial public offering of the recently formed unit, Dynegy Energy Partners LP. The company also will take as much as $450 million in charges against its second quarter earnings.
"Dynegy has always been an efficient organization, especially from a workforce standpoint," said Dan Dienstbier, Dynegy CEO. "Nevertheless, the new business environment in the merchant energy sector requires that we pare down certain businesses, such as power trading, and adjust accordingly in order to position the company for long-term, sustainable profitability," he said. Along with attrition and retirements, the staff reductions would result in savings of $35 million/year, the company said.
Currently, Dynegy's liquidity is "adequate" enough "to meet its obligations and commitments, even in the event of a loss of its investment grade rating by one or more credit rating agencies," it said.
The company also stated that it would be taking steps to improve the transparency and clarity of its financial reporting. This process will include the segregation of "financial contribution among earnings generated by regulated operations, term contracts, fee-based operations, and marketing and trading operations."
Credit ratings
Following Dynegy's announced plan, Standard & Poor's, a division of McGraw Hill Cos., New York, said it had lowered the firm's long-term corporate credit rating to BBB- from BBB. "The plan could bolster Dynegy's liquidity position," said S&P's analyst John Kennedy, "but implementation will likely weaken Dynegy's capital structure and business profile."
Kennedy added that while the sale of Dynegy's stake in NNG would raise capital, it would also "reduce the firm's mix of regulated businesses. This is the segment that helps to strengthen Dynegy's business profile."
Fitch Ratings, part of Fitch Inc., New York, meanwhile, downgraded Dynegy's indicative senior unsecured debt to BB+ from BBB-. "Additional concerns include the expected ongoing cash burn from (telecomunications) operations, uncertainties as to the future performance of energy marketing and trading, the need to resolve the $1.5 billion of (the company's) preferred stock held by ChevronTexaco Corp. that matures in November 2003, and the financial and operating pressures caused by a difficult business and capital market environment," Fitch said.
Williams's divestiture
Internationally, Tulsa-based Williams still retains a percentage interest in the JSC Mazeikiu Nafta refinery at Mazeikiai, Lithuania. It is Williams's hope to sell the US refining assets for more than $1 billion, it said.
"Because of their unique nature, these assets provide an opportunity to move quickly and at a scale that would allow very significant progress toward creating a solid financial foundation for the future," said Steve Malcolm, Williams chairman, president, and CEO.
Malcolm added that while the plants have performed well, "they are niche refineries that we believe would be of much greater value to companies whose core business is refining."
The divestment announcement follows the company reporting that it would part with roughly $3 billion in assets as a part of an overall plan to bolster the company's finances by a net $8 billion in the coming year (OGJ, June 3, 2002, p. 24). To date, the company said it has netted $5 billion of its planned total.
Assets for sale
Williams has received "numerous" offers from interested parties for the refining properties, including one unsolicited offer, said Phil Wright, president and CEO of Williams's energy services unit. The company has declined to name any of these interested companies, however.
"These are two unique refining and marketing enterprises that have consistently delivered solid performance for Williams," Wright said.
In Alaska, Williams will offer for sale its North Pole refinery, owned by its Williams Alaska Petroleum Inc. unit. Williams will also sell two associated petroleum products terminals, 29 Williams Express-branded retail outlets, its 3% stake in the TransAlaska Pipeline System, and its William Lynxs Alaska CargoPort LLC in Anchorage.
The North Pole refinery-which has a crude oil processing capacity of 220,000 b/d-designates 60% of its production to jet fuel and 40% to producing gasoline, naphtha, heating oil, diesel fuel, gas oil, and asphalt, the company said. Distribution from the refinery is via a 20,000 bbl jet fuel terminal at Fairbanks International airport and a 700,000 bbl terminal at Anchorage.
Meanwhile, in Memphis, the company is offering its refinery and the associated West Memphis, Ark., terminal, the pipeline connecting the refinery to the terminal, and the Collierville, Tenn., crude terminal. The refinery has a production capacity of 190,000 b/d. The plant produces gasoline, jet fuel, diesel, propane, and propylene, which it sells primarily to the mid-south region of the US. The petroleum products pipe- line linking the refinery to the company's West Memphis terminal was placed in service in September 2001.
Marathon-Globex deal
Marathon said that among other benefits, the acquisition would bolster the firm's holdings off Equatorial Guinea, which was established as a core area earlier this year through the purchase of the upstream and downstream interests in that country for $993 million from CMS Energy Corp., Dearborn, Mich. (OGJ, Nov. 12, 2001, p. 40). The deal will add 38 million boe in proven reserves to Marathon's operations portfolio.
Globex is an independent exploration and production company with operations exclusively outside the US. The firm holds 10.9% interest in Alba field off Equatorial Guinea and 12.5% interest in Stag field on the Northwest Shelf off Australia. Marathon already operates and holds 52.4% interest in the Alba production-sharing contract for Alba field. The current net production from Alba and Stag fields is 4,000 boe/d and 2,200 boe/d, respectively. Alba field is estimated to hold 5 tcf of dry gas and 300 million bbl of condensate, Marathon said.
In addition, Marathon will acquire a 9.4% interest in exploration Block D off Equatorial Guinea, which will raise its ownership in the block to 47%. Also, Marathon will now hold an additional 9% interest in the Bioko Island, Eqatorial Guinea, LPG processing facility, raising its interest in the plant to 52.2%. The Bioko plant recovers 17,000 b/d (gross) of condensate and 2,400 b/d (gross) of LPG from production from Alba field. About 120 MMcfd of lean gas is then fed to a methanol plant, in which Marathon holds 45% interest. The plant produces 2,500 tonnes/day of methanol.
In Australia, Marathon will acquire a 19% interest in one exploration block and a 15% interest in two additional exploration blocks in the Carnarvon basin on the Northwest Shelf.
The deal, which was subject to the approval of the Australian Foreign Investment, closed June 26.
Reactions
"(Marathon's) Globex acquisition adds additional attractive West African exposure," said Tyler Dann, Banc of America Securities LLC analyst, in a research note following Marathon's acquisition announcement.
"Marathon is poised to improve its upstream business," Dann said. "Mara- thon believes it has the ability to grow proved reserves by 40% by 2004 at a cost of around $5-6/boe, far below the company's 3-year average historical finding and development cost of $11.98/boe."
Based on the purchase price and level of reserves, Marathon acquired Globex for $4.08/boe, said Steven A. Pfeifer, first vice-president with Merrill Lynch. "The company expects to add an additional 12 million boe of proven reserves in (Equatorial Guinea) upon approval of an expansion project. The acquisition price appears rich given the 17-year reserve-to-production ratio of acquired reserves," Pfeifer said in a research note.
Marathon's Globex acquisition represents 17% of its $900 million exploration and production capital outlay budget for 2002, Pfeifer said, adding that Marathon's "disappointing exploration and development results will likely require the company to purchase reserves to replace production."
