US merger and acquisition activity was given another shot in the arm in recent weeks with the announcement of a multibillion-dollar merger deal between Domin ion Resources Inc., Richmond, Va., and Oklahoma City-based Louis Dreyfus Natural Gas Corp. (LDNG). Dominion plans to acquire LDNG in a deal worth $2.3 billion in cash, stock, and assumed debt that will increase Dominion's natural gas reserves 60% and expand its fast-growing energy trading business, Dominion said.
Elsewhere, the creation of yet another supermajor oil company was given the nod by US regulators, provided the two firms-Chevron Corp. and Texaco Inc.-follow the approved asset divestiture plan.
In the downstream sector, meanwhile, Phillips Petroleum Co. completed its $7 billion acquisition of Old Greenwich, Conn.-based Tosco Corp. (OGJ, Feb. 12, 2001, p. 33).
Other company news in recent weeks included the following:
- TEPPCO Partners LLP, Houston, will acquire the Jonah gas gathering system in Wyoming from Alberta Energy Co. Ltd., Calgary, for $360 million, AEC reported. AEC acquired the Jonah system when it bought McMurry Oil Co. in June 2000.
- Sunoco Inc., Philadelphia, said it would form a master limited partnership, Sunoco Logistics Partners LP, to own and operate a substantial part of its assets.
Dominion-LDNG deal
Dominion's acquisition of LDNG-one of the largest US independent natural gas companies-is expected to be completed in the fourth quarter.
Following the pending close of Domin ion's purchase of LDNG, Dominion's exploration and production unit will own more than 4.6 tcfe of proved reserves and will have annual production of more than 450 bcf-an increase of more than 40% over its current production.
Added to Dominion's existing 22,000 Mw electric generation portfolio, the deal will give the broad-based energy company more than 3 trillion btu/day of energy production capability, officials said.
"The acquisition of [LDNG] is a natural fit economically, strategically, and geographically," said Thomas E. Capps, chairman, president, and CEO of Dominion.
"From an economic and strategic standpoint, quality of assets matters in the natural gas business," he said. "[LDNG's] long-lived reserves and extensive leasehold acreage complement the quality of Dominion's existing natural gas properties. The growth it provides to our base of physical assets is consistent with our strategy of 'trading around assets' and provides an expanded physical platform to fuel our growing natural gas trading and marketing business."
Capps said the transaction also provides Dominion an additional upside from the positive supply and demand fundamentals that are expected in coming years.
He said, "Geographically, [LDNG's] drilling program in the Permian basin, Midcontinent, and Gulf Coast complements our own operations."
Still, Capps said, "The goal in acquiring [LDNG] is to enhance our portfolio of fully integrated energy businesses, not to become a bigger E&P company. We're still comfortable with our target of a 25% earnings contribution over the long term from our E&P operations."
Dominion, already one of the nation's largest traders of gas and electricity, expects the LDNG acquisition to help double its energy trading and sales volumes above last year's level within 3 years. Company executives expect annual gas trading volumes to increase to 2.4 tcf from 1.2 tcf, and for electricity trading volumes to grow to 265 million Mw-hr/year from 136 million Mw-hr/year.
Dominion deal's terms
Under terms of the agreement, which has been unanimously approved by both companies' boards, Dominion will acquire all of LDNG's outstanding shares for $20/share in cash and a fixed exchange ratio of 0.3226 shares of Dominion common stock.
Dominion will issue to LDNG shareholders 14.4 million shares of its stock, valued at $900 million based on the Sept. 7 closing price of $62.63/share, plus $890 million in cash.
Dominion also will assume $505 million of LDNG's debt.
Subsidiaries of SA Louis Dreyfus Natural Gas & cie., which as a group owns and controls more than 42% of LDNG's outstanding shares, have committed by separate agreement to vote their shares in favor of the Dominion acquisition.
Meanwhile, Dominion officials reaffirmed they expect the company to meet or exceed 2001 earnings of about $4.15/share or better, and 2002 earnings of $4.85-4.90/share on a stand-alone basis.
The LDNG acquisition is expected to be immediately accretive by at least 5¢/share to current 2002 earnings expectations, with its contributions to grow in subsequent years, said officials.
LDNG has already hedged a substantial portion of its expected 2002 production.
In connection with the proposed transaction, LDNG agreed to sell 48 bcf of gas to Dominion at prevailing gas futures prices in the next calendar year.
The proposed acquisition is subject to approval by LDNG shareholders and the customary regulatory reviews. LDNG agreed to pay a $70 million breakup fee if the purchase is not consummated.
Mark E. Monroe, president and CEO of LDNG, said, "This transaction benefits our shareholders by providing an attractive near-term return and opportunity to participate with a larger company involved in more facets of the energy business."
LDNG will be merged into Dominion's subsidiary, Consolidated Natural Gas Co. Dominion anticipates retaining most of LDNG's 400 employees.
Dominion will finance the cash portion of the transaction with a bridge loan facility, which will be replaced with proceeds from a combination of permanent debt financing and equity hybrids.
Following Dominion's announcement to buy LDNG, Moody's Investors Service placed under review for possible downgrade the ratings of Dominion and its subsidiaries Consolidated Natural Gas Co. and Virginina Electric & Power Co. The investment firm, meanwhile, placed LDNG's ratings under review for possible upgrade.
"In its review," Moody's said, "[we] will assess how the additional cash flows and a greatly expanded E&P platform may mitigate the risks of additional debt and business risk. We will also review the financing, which has yet to be finalized."
Chevron-Texaco merger
The US Federal Trade Commission's consent order for the $35 billion merger of Chevron and Texaco also provides "a practical framework" for units of Shell Oil Co. and Saudi Arabian Oil Co. to acquire Texaco's interests in Equilon Enterprises LLC and Motiva Enterprises LLC, officials said.
Meanwhile, Avfuel Corp., Ann Arbor, Mich.-the leading US independent supplier of aviation fuels and services-agreed to buy Texaco's general aviation businesses in California, Alaska, Washington, Idaho, Nevada, Oregon, Utah, Arizona, Louisiana, Mississippi, Alabama, Georgia, Florida, and Tennessee.
Divestiture of that portion of Texaco's general aviation business also satisfies a requirement under the FTC's consent order.
The FTC order, announced earlier this month, will permit Shell Oil Products Co. LLC and Saudi Refining Inc. (SRI) to "complete a financially sound acquisition of the Texaco interest in Motiva and for Shell to acquire Texaco's interest in Equilon," Shell and Saudi officials said.
The order, to which both Chevron and Texaco agreed, stipulated that Texaco first must divest its interests in Motiva and Equilon, which were created in 1998 through combination of the US refining and marketing businesses of Shell, Texaco, and Star Enterprises, itself a joint venture between Texaco and SRI. Shell and Texaco own 56% and 44%, respectively, of Equilon, while Shell, Texaco, and SRI own about a third each of Motiva.
"Shell and SRI remain the natural buyers of Texaco's interests, and we remain open to discussions with Texaco to ac com plish these acquisitions," officials said.
Although the three companies have been negotiating for months, Texaco apparently has not yet agreed on a price for its interests in the two joint ventures (OGJ Online, June 1, 2001). The book value for Equilon and Motiva was estimated at some $2.8 billion at the end of June.
To prevent negotiations for those downstream operations from being drawn out indefinitely, the order provides for an independent trustee to complete the sale of Texaco's interests within 8 months of the merger at no minimum price.
"We are also prepared to negotiate directly with the divestiture trustee in order to acquire those interests on terms that provide us with a fair return on our respective investments. We plan to complete this process in a manner that is most beneficial to the businesses," Shell and SRI said in their joint statement.
Motiva is a refiner and marketer of petroleum products in the eastern and Gulf Coast areas of the US under the Texaco and Shell brand names. Motiva has a total refining capacity of 800,000 b/d. SRI sells roughly 450,000 b/d of crude to the joint venture.
Shell Oil Products holds the parent's equity interest in Equilon, Motiva, and the Deer Park Refining LP.
Avfuel expects to complete its acquisition of Texaco's general aviation fuel business shortly after the merger with Chevron.
It will be Avfuel's seventh aviation fuels acquisition and the fourth public company division to be incorporated into Avfuel in a string of acquisitions begun over a decade ago, the company said.
Avfuel was founded in the early 1970s and has grown from a regional supplier to a major international presence through aggressive acquisitions and marketing alliances with other companies, officials said.
"The acquisition of this portion of Texaco's General Aviation business takes Avfuel Corp. up to the next level in its mission to become an undisputed global leader in general aviation [fuels]," said Craig R. Sincock, president.
As part of the transition, Avfuel recruited several executives of Texaco Aviation Products LLC, including Ron Grundstein, current vice-president and North American general manager; Frank Dellapenta, vice-president; and four regional account managers.
The merger of Chevron and Texaco into ChevronTexaco Corp. would created the third largest US oil and gas producer, with production of 1.1 million boe/d. The new company also would hold the nation's third largest reserve position, with 4.2 billion boe of proved reserves.
Phillips-Tosco deal closes
Phillips closed on its acquisition of Tosco after the FTC cleared the merger without requirements for divestitures.
Following the transaction, each share of Tosco common stock was converted into the right to receive 0.8 share of Phillips common.
Based on Sept. 10 closing prices, Tosco shareholders are receiving Phillips shares worth $7.3 billion, a 35.4% premium over the value of Tosco immediately preceding the announcement of the deal on Feb. 4.
Jim Mulva, Phillips's chairman and CEO, said, "We have combined two strong complementary companies into a significant refining and marketing competitor in the US."
He said the merger will result in operating savings of $250 million in 2002.
Michael Panatier will be CEO of Phillips's refining, marketing, and transportation business, Phillips 66 Co. He also will remain executive vice-president of Phillips Petroleum Co.
Tom O'Malley, chairman and CEO of Tosco, will serve as Phillips's vice-chairman through Dec. 31. He also will be a director of Phillips.
Phillips 66 now owns 10 US refinery systems with a combined capacity of 1.7 million b/d, along with a 75,000 b/d refinery in Ireland. The company will market through 12,400 branded outlets.
The company's refining headquarters are in Linden, NJ, and marketing headquarters are in Tempe, Ariz.
TEPPCO purchase
On behalf of TEPPCO, Duke Energy Field Services, a unit of Charlotte, NC-based Duke Energy Corp., will operate Jonah gas gathering system.
TEPPCO said the acquisition will give it 300 miles of pipeline, five compressor stations, and related metering facilities. The purchase is expected to close by the end of this month.
AEC CEO Gwyn Morgan said the company retained long-term gas transportation agreements on the system to assure "competitive market access for our growing Wyoming production." He said the sale will have no impact on AEC's gas operating or transportation costs.
The Jonah system is undergoing an expansion to increase throughput to more than 700 MMcfd from 460 MMcfd of natural gas.
AEC said it expects to record a gain of $100 million (Can.) on the sale. Proceeds will be used to reduce bank debt. AEC said its forecast for midstream operating cash flow remains unchanged at about $300 million (Can.) in 2001.
AEC, which operates primarily in western Canada, the US Rockies, and Ecuador last year set a target to double production from existing assets within 5 years.
Sunoco limited parntership
Sunoco said it would file a registration statement this month for a public offering of common units in the partnership.
Sunoco refines and markets petroleum and petrochemical products. It is one of the largest independent refiner-marketers in the US, with 730,000 b/d of refining capacity, 4,100 retail sites, interests in more than 10,000 miles of crude oil and refined product pipelines, and 35 product terminals.
The company has more than 9 billion lb/year of petrochemicals production capacity, largely chemical intermediates used in the manufacture of fibers, plastics, film, and resins.
It also uses a proprietary technology to make 2 million tons/year of high-quality metallurgical-grade coke for use in the steel industry.