El Paso Corp. (EP) intends to separate its exploration and production unit from its pipeline and midstream businesses in a tax-free spinoff by the end of the year.

The move, long anticipated by investors and analysts, follows in the footsteps of several other large U.S. companies that have determined in recent months that the sum of their parts is worth more than the whole. Similar energy sector breakups have recently been announced by Williams Cos. (WMB), Marathon Oil Corp. (MRO) and Questar Corp. (STR).

Hedge fund JANA Partners LLC boosted its stake in El Paso earlier this month to just over 4%, a move that was widely viewed as an effort to help force the natural-gas provider to break up.

El Paso executives said Tuesday that they have long contemplated a split. But until recently they had been preoccupied with righting El Paso's balance sheet in the wake of the energy trading collapse that nearly claimed the Houston company in the last decade.

"For years the balance sheet has been a barrier to doing this," Chief Financial Officer J.R. Sult said during the company's annual investor day in New York.

Shares of El Paso rose on the news, trading up 7.22% higher at $20.35. The stock has risen 79% over the past 12 months as of Monday's close.

Chief Executive Doug Foshee said that the potential to boost value for shareholders "overwhelms the quantifiable benefits" of remaining a single company.

"I've espoused for many years the benefits of a combined enterprise; I still believe in those," Foshee said. "But this isn't a close call."

Following the proposed spinoff, El Paso will be composed of its pipeline group, midstream group and its general and limited partner interests in El Paso Pipeline Partners LP (EPB).

"We think we're about to create two very strong independent entities that will compete very well in their chosen areas," said Foshee, who will remain chairman and chief executive of the pipeline company and will serve as the exploration and production firm's chairman. "Shareholders will be able to assess each business separately, it will simplify each companies' equity story and it will allow greater management focus within each company."

Sult said that the pipeline company will benefit from reducing its exposure to commodity price volatility as well as the expenses associated with a capital intensive exploration business. As such, El Paso, which owns the largest network of interstate natural-gas pipelines in North America, plans a 2012 annual dividend of 60 cents a share and anticipates a low double-digit dividend growth rate.

The company's exploration and production business, meanwhile, has more than 10 years drilling inventory to fuel its future growth, said Brent Smolik, who heads the unit and will become the new company's chief executive. The company operates in the U.S., Brazil and Egypt.

Earlier Tuesday, El Paso said it increased its 2011 exploration and production budget by $300 million to $1.6 billion in orders to increase drilling activity on its oil-rich properties in south Texas' Eagle Ford shale formation.

 
    -By Ryan Dezember and Melodie Warner, Dow Jones Newswires; 713-547-9208; ryan.dezember@dowjones.com
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