2nd UPDATE: El Paso To Split Pipeline, Exploration Groups
May 24 2011 - 12:36PM
Dow Jones News
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), Questar Corp. (STR) and
Marathon Oil Corp. (MRO), which on Tuesday received approval from
the Internal Revenue Service to spin off its refining business tax
free.
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 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 6.9% higher at
$20.29. 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 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 a anticipates 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.
El Paso's split has long been advocated by analysts and
investors. But there has been disagreement on how the company
should proceed. Analysts with Tudor, Pickering, Holt & Co., for
example, said in a note to clients in advance of Tuesday's investor
meeting that the company should continue to separate its businesses
through asset sales to El Paso Pipeline Partners, instead of a
quick split Going the deliberate route, the analysts said, would
ultimately generate more cash, which could be used to reduce debt
and fuel development of "an exciting set" of oil-and-gas-producing
properties.
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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