Some US-based oil and gas companies are continuing to pair off while others are strengthening their core assets through key property acquisitions.
Last month, Magnum Hunter Resources Inc. said it planned to merge with Prize Energy Corp. to form a $1.2 billion independent oil and gas company. The firm, which will retain the Magnum Hunter name, will be headquartered in Irving, Tex.
Also last month, Kinder Morgan Energy Partners LP (KMP) said it would purchase Tejas Gas LLC-a wholly owned subsidiary of InterGen (North America) Inc.-for $750 million in cash. The deal is expected to close in the first quarter.
Separately, KMP said it plans to acquire Enron Corp.´s 33.3% interest in Trailblazer Pipeline Co. for $68 million in cash, increasing its ownership to 100%.
Shell Oil Co. and Saudi Refining Inc. plan to acquire ChevronTexaco Corp.´s interests in Equilon Enterprises LLC and Motiva Enterprises LLC for $3.86 billion.
Petroleo Brasileiro SA said it is ready to spend $3 billion to purchase an oil company that will expand its production in the Gulf of Mexico, according to the company´s financial director Joao Nogueira Batista. Batista said that Petrobras, which is receiving proposals from banks, is looking for a medium-sized oil company with a daily production of 100,000 boe/d from the gulf.
Houston-based El Paso Corp. said last month it plans to sell all of its deepwater operations in the Gulf of Mexico, its US Midcontinent oil and gas assets, and "a significant component" of its Rocky Mountain properties. It also put on the block the coal properties and the 140,000 b/d Eagle Point refinery in Westville, NJ, obtained through its acquisition of Coastal Corp., Houston, in early 2001. Sale of all of those assets is expected to generate $2.25 billion in cash.
Magnum Hunter, Prize
The combination of Magnum Hunter and Prize Energy will create a single company "that is stronger and in a better position to compete than either would be independently," said Gary Evans, chairman, president, and CEO of Magnum Hunter. Evans will serve as president and CEO of the merged company.
If stockholders approve the merger, Prize shareholders will get $24/share payable in 2.5 shares of Magnum Hunter common for each share of Prize Energy, plus a cash component that will be determined based on a sliding scale with a minimum of 25¢/ share. The merger will be nontaxable to the shareholders. Magnum Hunter shareholders will own 51% of the combined company.
The merged company will have a debt-to-capitalization ratio below 60% and improved financial coverage ratios. Magnum Hunter and Prize Energy said the merger would result in cost savings of $8-10 million/year.
On a combined basis, the companies had reserves of 1 tcf of natural gas as of Dec. 31, 2000. For the 9 months ended Sept. 30, 2001, the companies´ production was 232 MMcfed of gas. The reserves-to-production ratio is more than 12 years.
Magnum Hunter and Prize Energy both have core operating areas in the Permian basin of West Texas and southeastern New Mexico, the Midcontinent region of western Oklahoma and the Texas Panhandle, and the onshore Gulf Coast area of South Texas and Louisiana.
The two firms have a 5-year drilling inventory of 1,000 onshore locations and have undrilled blocks in the shallow waters of the Gulf of Mexico.
They will have hedged 2002 gas production of 103 MMcfd at a New York Mercantile Exchange weighted average floor price of $3.44/Mcf and hedged oil production of 5,750 b/d at $23.23/bbl.
Kinder Morgan, Tejas
Tejas Gas, with a transportation capacity of 3.5 bcfd, is a 3,400 mile intrastate gas pipeline system extending from south Texas to the Louisiana border. Intergen is a joint venture owned by affiliates of the Royal Dutch/Shell Group and Bechtel Enterprises Holding Inc.
KMP said Tejas Gas is a good fit with Kinder Morgan Texas Pipeline, a 2,600 mile intrastate pipeline. KMP said combining the systems will increase transportation capacity, improve reliability, and create additional services for its customer base.
The Tejas Gas system has 16 compressor stations with 73,585 hp, two natural gas storage facilities with 100 bcf of working gas capacity, and three fee-based, gas processing-treating facilities.
"We will gain access to new, growing markets, including Austin, Corpus Christi, and Texas City," said Richard Kinder, KMP chairman and CEO. "In addition, we will be able to substantially reduce corporate costs, yet still offer more services to customers. We also expect to realize solid growth on the system, primarily due to increased demand for natural gas to fuel new gas-fired power plants that are being built along the pipeline."
Tejas Gas has access to the major supply areas of South Texas, the Texas Gulf Coast, and East Texas. It is a major provider of gas to refining, petrochemical, gas and electric utilities, independent power generation, and industrial markets.
"Tejas Gas has long-term pipeline transportation and sales contracts in place and operates fee-based facilities, which fits our strategy perfectly," Kinder said.
KMP has announced almost $1.4 billion in acquisitions in 2001 and over $6 billion since its formation less than 5 years ago. KMP said it has maintained a strong balance sheet by issuing equity in conjunction with accretive transactions.
"Our accretion guidance conservatively assumes that the Tejas transaction is financed with sufficient equity to return KMP to its targeted 40% debt-to-total-capital ratio. We expect the vast majority of the equity will be raised via another offering of Kinder Morgan Management LLC shares to institutional investors once the transaction closes. We do not expect to issue additional KMP common units in a public offering," Kinder said.
Kinder added that the acquisition will be accretive to cash available for distribution to KMP unitholders and the annual distribution per unit would be increased at least 10¢ to $2.30 in the first full quarter after the transaction closes.
"We now expect to achieve KMP´s previously announced annualized distribution target of at least $2.50/unit by yearend 2002, without any additional acquisitions. Additionally, we are increasing our 2002 earnings/share guidance for Kinder Morgan Inc. by 15¢ to between $2.55 and $2.65, up from the previously announced level of between $2.40 and $2.50. We are comfortable with the low end of this range, which represents an approximate 35% increase over 2001 consensus estimates of $1.91, without additional acquisitions."
KMP´s Trailblazer purchase
Kinder Morgan has been in negotiations to buy the 436 mile Trailblazer line for several months, it said.
If approved by the Enron board and Enron´s bankruptcy court, the deal would close in the first quarter.
The Trailblazer Pipeline extends from Rockport, Colo., to Beatrice, Neb. KMP operates the line.
"We are delighted to increase our ownership in Trailblazer, which generates reliable cash flow and is expected to experience significant growth in 2002 once our current expansion project is completed," said Richard Kinder.
Trailblazer is expanding capacity to 846,000 dekatherms/day (Dth/d) from 522,000 Dth/d (OGJ Online, Aug. 9, 2000). The additional 324,000 Dth/d of capacity, to come online in mid-2002, has been fully subscribed in long-term, firm-transportation contracts. The expansion will cost $58 million.
Kinder said it has been interested in increasing its ownership of Trailblazer since it acquired its first stake in 1999.
Through capital contributions it will make to the expansion project, CIG Trailblazer Gas Co.-an affiliate of El Paso Corp.-is expected to become a 7-8% equity owner in Trailblazer Pipeline Co. in mid-2002 when the work is completed, KMP said.
Shell, SRI acquisition
The US Federal Trade Commission had required Texaco to divest the holdings as a condition of its $35 billion merger with Chevron Corp.
Texaco Alliance Trust, which was holding the assets until the deal was made, said the purchase included $2.26 billion in cash (including $160 million in dividends) and the assumption of $1.6 billion in debt and other liabilities.
Under terms of the transactions, SRI will own 50% of Motiva while Shell will own the other 50% of Motiva and 100% of Equilon (OGJ Online, Oct. 9, 2001).
The transactions, which are subject to government approval, are expected to conclude this month.
Motiva operates primarily in the eastern US and includes 4,800 Shell-branded gasoline stations and 8,200 Texaco-branded stations, four refineries, and a network of terminals. In July 1998, Shell´s eastern and Gulf Coast refining and marketing businesses were combined with similar operations owned by Star Enterprise, a joint venture between Texaco and SRI, through the formation of Motiva.
Equilon operates primarily in the western US, and includes 4,500 Shell-branded gasoline stations and 4,500 Texaco-branded stations, four refineries, a lubricants business, and a pipe- line and terminal network. Equilon was formed in January 1998, when Shell´s western and midwestern refining, marketing, trading, transportation, and lubricants businesses were combined with similar operations of Texaco.
SRI is a subsidiary of Aramco Services Co., Houston, and sells 525,000 b/d of crude to Motiva, which has a refining capacity of 800,000 b/d.
Petrobras acquisition
Petrobras analysts said the recession in Europe, the US, and Japan, plus the situation in the Middle East, creates a favorable scenario for purchases in this region, particularly because Petrobras recently had record net profits.
If low oil prices and lower stock values for oil companies continue, an acquisition is possible during the first half of 2002, Batista said.
The purchase would help Petrobras to boost oil production outside Brazil from a current 64,000 boe/d to its goal of 300,000 boe/d by 2005. The company is targeting the Gulf of Mexico because it has so far invested comparatively little in this highly promising area, said sources at Braspetro, Petrobras´s international subsidiary.
A Petrobras source who requested anonymity told OGJ Online that the company would not be able to fulfill its target (part of the official strategic plan) of producing 300,000 boe/d by 2005 if it does not purchase an oil company abroad.
At present, Braspetro is producing only 10,500 boe/d in the Gulf of Mexico, compared to 22,000 boe/d in Colombia, 17,000 boe/d in West Africa (principally Angola), 10,000 boe/d in Argentina, and 8,000 boe/d in Bolivia, said company officials.
Petrobras´s financial department is considering using the company´s cash flow, which currently totals $2 billion, or issuing bonds to finance the proposed purchase.
Utilizing the company´s cash flow by remitting $3 billion abroad would pressure upward the value of the US dollar compared to Brazil´s currency, officials said. Issuing bonds would precipitate high costs because it involves issuing American Depositary Receipts.
Braspetro is active in the US, Trinidad and Tobago, Colombia, Bolivia, Argentina, Nigeria, Equatorial Guinea, and Angola.
El Paso´s divestitures
El Paso executives anticipate a quick sale of its assets. "We believe all of these are highly attractive assets, and so we expect to execute that first phase of the plan largely during the first quarter," said Ralph Eads III, president of the El Paso Merchant Energy group, in a teleconference with financial analysts.
"A lot of these assets are pent up things that we would have sold previously, but we really couldn´t. Now we´re in a position where, as part of this program, we´re going to do this," Eads added.
El Paso Chairman and CEO William A. Wise told analysts, "We were in a post-pooling period after completing two large pooling transactions. We weren´t contemplating disposing of any of the assets." In addition to its merger of Coastal, El Paso expanded into Canada this year with its acquisition of Velvet Exploration Ltd. in Calgary.
However, Wise said, "Circumstances are completely changed now, impacted by Enron´s bankruptcy and changes in the ratings standards by one of the rating agencies, which gives us the opportunity to monetize some assets that, when pooling permitted, we would have looked at."
The assets being offered are nonstrategic and will not significantly impact the company´s reserves and production, said company officials.
The upstream properties are "uncomplicated" and should be liquidated fairly easily, said Eads. "There is a lot of liquidity out there in the acquisition market for this sort of thing," he said. But sale of the refinery and coal properties will be "more complicated" and likely will take longer to complete.
In corporate publications, El Paso Production Co., the exploration and production arm, earlier claimed to be the largest lease holder and most active driller in the Gulf of Mexico, with a highly successful deep-drilling program on the Outer Continental Shelf and significant deepwater potential.
But Eads told analysts, "We don´t have a large position in the deep water. It´s not a place where we´re a significant factor, so we´re going to divest those [properties]."
He seemed to indicate that some of El Paso´s properties in the gulf´s shallower waters also may be offered for sale. "We have additional shelf assets, so there´s going to be a Gulf of Mexico package," Eads said.
"We´re going to divest our Midcontinent assets. These are very attractive assets, so there will be a lot of people interested in these," he said, without providing any breakdown or even a summary of those properties. "We´ve thought for some time, that we either needed to be bigger in the Midcontinent or exit."
In addition, he said, "We´re going to have a significant component of our Rockies assets that is going to be sold."
Under subsequent questioning by analysts, El Paso officials said only that the earmarked properties included "hundreds of fields" and "properties late in their life."
Company publications describe El Paso Production as the third largest North American producer, with a reserve base of 6.4 tcfe, 90% of which is gas. Its operations are focused in the salt basins of East Texas and northern Louisiana; the Wilcox and Vicksburg trends in South Texas; the producing areas of the Gulf of Mexico, both onshore and offshore; and the Piceance, Wind River, and Uintah basins in the Rocky Mountains.
"We´re going to divest the Eagle Point refinery," said Eads. "We´re not going to divest our Aruba refinery. It´s an asset that is profitable even in the current environment. It´s also an important asset in our trading business. But Eagle Point is not important."
El Paso´s 280,000 b/d distillates refinery in Wicklund, Aruba, was part of the Coastal acquisition.
As for the former Coastal coal operations, Eads said, "We are going to monetize that."
In addition, he said, "Texas midstream assets will be sold to the master limited partnership, continuing our track record of having done that successfully."
That sale "is a factor of how fast we can move the price through. That could happen in the first quarter, too," said Eads.
El Paso Midstream Group provides gathering, treating, processing, compression, and intrastate transmission services to producers throughout the southern United States and the Gulf of Mexico. El Paso Energy Partners LP is an El Paso affiliate.
El Paso´s proposed program to reduce its total debt-to-capital ratio also includes:
- Reduction of capital spending to $3.1 billion next year and generation of more than $1.5 billion of free cash flow.
- Increasing common equity by at least $1.3 billion through retained earnings and equity financings.
- Elimination or renegotiation of rating triggers in certain financing.