With domestic natural gas production growing and gathering opportunities opening up, it’s an “optimum time” for El Paso Corp. to reenter the midstream business, an executive said last week.

The Houston-based company was struggling to survive in 2003 when it began to sell stakes in its prestigious midstream business GulfTerra Energy Partners LP. El Paso agreed to merge its GulfTerra system into a new partnership venture with Enterprise Products Partners LP in December 2003, which gave El Paso some much needed cash and a half-stake (see NGI, Dec. 16, 2003).

But just a few months later El Paso cut its holdings in the Enterprise-led partnership to less than 10% in exchange for a $370 million cash infusion (see NGI, April 26, 2004). By 2005 El Paso was out of the midstream business, and it instead trained its attention on the steady, strong earnings of its stellar interstate gas pipeline unit and it began to rebuild its challenged exploration and production (E&P) business (see NGI, March 21, 2005; Jan. 24, 2005).

Now the once mighty empire is striking back.

“We see some pretty good synergies between our interstate natural gas pipelines and E&P businesses,” El Paso spokesman Richard Wheatley told NGI last week. “We’ve looked at that, and we think it’s an optimum time to get back into midstream.”

In a “Sophie’s choice” proposition, El Paso was forced to choose which of its businesses would survive as the merchant energy sector began to implode in 2002. The decision to begin exiting the midstream business in 2003 “was necessitated by the fact that we needed to clean up our balance sheet and reduce our debt,” Wheatley said.

“We don’t have any assets yet, but we have a variety of options,” he explained. “The general terms could include acquiring assets, building assets…but it does not mean we’re going to incur a whole lot of debt in this process.”

In announcing the move, CEO Doug Foshee realigned his management team and tapped current CFO Mark Leland to lead the effort. Before becoming El Paso’s finance chief, Leland was COO of GulfTerra. Chief Accounting Officer John Sult is taking over as CFO, and Dane Whitehead, CFO of El Paso Exploration & Production Co., has been tapped as senior vice president of strategy and enterprise business development, including acquisitions and divestitures. Sult and Whitehead also are joining El Paso’s executive committee.

“We intend to reenter the midstream business, as Doug Foshee said, at ‘a measured pace’,” Wheatley said. “What that actually means is we can’t put too much granularity” yet on where the midstream unit will begin to buy or build. “We’re very early in the process…we’re formalizing our entry…

“We’ve had some people suggest that we might be interested in building in the Haynesville [shale] or the Eagle Ford plays but I really can’t expand on that yet.” Wheatley also was mum on whether El Paso could roll out the new venture as a partnership, akin to the former GulfTerra business.

“It’s a very small group of executives who’ll be involved in reforming our midstream business. Mark Leland has a lot of experience in house to put this together, and he’s going to lead a small group of executives in putting this together. It’s going to be very prudently done in the number of options they pursue…

“The bottom line is whether or not we acquire assets or build assets and where we’re going to do it. I can’t tell you, but we do see synergies out there.”

El Paso has three E&P divisions: Western, Central and Gulf Coast. Energy analysts last Tuesday pointed to El Paso’s holdings in the Haynesville Shale of Louisiana and the South Texas Eagle Ford play as sites for new midstream, but as Wheatley pointed out, the company has a “very important” leasehold in the Raton Basin in the Rocky Mountains, where “we have 900-plus producing wells, coalbed methane wells…in northern New Mexico and southern Colorado…”

In addition, the E&P unit has onshore exploration under way in the Arkoma Basin and in East Texas.

“There are a number of asset areas, of course, that will be looked at for possible opportunities, but that doesn’t preclude the fact that we may want to go out and acquire something as well if it’s a good fit for the company,” said Wheatley. “We will look internally and externally for opportunities, and for what makes the most sense in terms of value for the company…”

Tudor, Pickering, Holt & Co. Securities Inc. (TPH) analysts said at first glance, the move by El Paso to add a midstream business is “puzzling.” The company “already has enough capital intensive businesses that are long on investment opportunities, so why add another?” The TPH team said it is “hoping El Paso’s mantra will be to facilitate getting [the] E&P segment’s gas production to market, not to buy assets.”

RBC Capital Markets analyst Lasan Johong wants more information on the move, but the analyst was generally positive about the midstream opportunities awaiting El Paso.

“We view the formation of a midstream segment as strategically positive; however, we look for further clarity regarding El Paso’s strategy for building the business, including specific assets, plans for capital deployment, contract type, timing and anticipated contribution to the overall business model.”

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