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Private Equity Takes El Paso E&P in $7.15B Deal

A consortium of private equity investors is readying a $7.15 billion leveraged buyout of El Paso Corp.'s exploration and production (E&P) business, which includes an array of liquids-rich U.S. unconventional property that extends across Texas, Louisiana, the Raton Basin and the Rocky Mountains.

The deal, announced late Friday, was put on the table by a group led by Apollo Global Management LLC, Riverstone Holdings LLC and Access Industries Inc.

El Paso is in the midst of a friendly merger with Kinder Morgan Inc., which said last October it had no interest in the E&P arm (see Shale Daily, Oct. 18, 2011). The sale of the E&P business rivals a deal last November by a KKR & Co.-led group to acquire privately held Samson Investment Co. for $7.2 billion (see Shale Daily,Nov. 28, 2011).

With El Paso in the midst of transitioning it wasn't able to hold a conference call or issue statements regarding negotiations. However, Apollo's Josh Harris, senior managing director, said his company was acquiring "an impressive portfolio of valuable natural resource assets, a talented management team and a remarkable group of highly skilled employees. We look forward to building on El Paso's impressive track record of success in partnership with Apollo's natural resources expertise."

EP Energy has activity ongoing in the Eagle Ford Shale, Wolfcamp formation and in the shallow waters of the Gulf of Mexico. The central division's assets are spread across East Texas and North Louisiana in the Haynesville Shale, as well as in South Louisiana's Wilcox formation.The western division activity is concentrated he Altamont oil play, Raton Basin and the Rocky Mountains. Overseas, El Paso operates in Brazil's offshore, in the Camamu, Espirito Santo and Potiguar basins. It also has ongoing activity in Egypt's Western Desert.

The EP Energy buyout is said to be contingent on the corporation's merger with KMI; both transactions are slated to close by the end of June.

"As announced in October 2011, El Paso's net operating loss carry-forwards will largely offset taxes associated with the sale of the exploration and production assets, and thus almost the entirety of the proceeds from this sale will be used to substantially reduce the debt borrowed by KMI to fund the cash portion of its purchase of El Paso," KMI stated.

The pending sale would allow the E&P unit to be kept as a "single entity," noted KMI CEO Rich Kinder. "We thank the EP Energy employees for their efforts to build a strong company and in facilitating the sales process."

The E&P business for years had been considered a drag on El Paso, whose forte is natural gas pipelines and midstream infrastructure. The company last May announced that it would spin off the unit to shareholders (see Shale Daily, May 26, 2011). And at that time, potential buyers began to express an interest in buying the business outright, sources told NGI's Shale Daily. However, once KMI launched its takeover, the suitors began their pursuit in earnest.

According to the sources, Apollo was a leading contender for months; its pursuit was internally dubbed "Project Everest," primarily because the private equity firm said from the start it intended to buy the entire package of E&P properties.

Apollo, with more than $75 billion in private equity funds invested across a core group of nine industries, is highly regarded. In 2009 one of Apollo's units purchased Midland, TX-based Parallel Petroleum for around $495 million. Parallel, among other things, had held a 35% stake in 34,500 acres of the Barnett Shale with leasehold partner Chesapeake Energy Corp. Chesapeake in early 2009 took over drilling and development commitments through 2016 to help its struggling partner. Late last year Apollo sold Parallel for an estimated $780 million; Samsung C&T Corp., the trading arm of Samsung Group, agreed to purchase a 90% stake while Korea National Oil Corp. bought the remaining interest.

Meanwhile, Riverstone, an energy and power-focused private equity firm, has more than $18 billion of equity capital raised across seven investment funds and coinvestments. Riverstone participated in at least 24 energy-related transactions in 2011. Among other things, it provided about $900 million in equity to Legend Natural Gas IV LP to acquire Barnett Shale properties from Range Resources Inc. (see Shale Daily, March 7, 2011). It also provided Legend almost $100 million to acquire South Texas property from Smith Production Inc. In early 2011 it invested in Three Rivers Natural Resource Holdings LLC, which significantly expanded its position in the Permian Basin.

Access is a privately held, U.S.-based industrial group with worldwide holdings. Access spans three key sectors: natural resources and chemicals; telecommunications and media; and real estate. Within its natural resources holdings Access has investments in LyondellBasell, TNK-BP UC Rusal and Boomerang Tube.

The private equity consortium plans to use around $3 billion in capital to back the EP Energy transaction and draw around $5.5 billion in financing arranged by seven banks, led by JPMorgan Chase and Citigroup.

El Paso reported on Monday that its E&P production volumes rose 11% in 4Q2011 from a year earlier to 880 MMcfe/d; the year-end production exit rate exceeded 900 MMcfe/d. Oil output was up by 50% year/year to 22,300 b/d.

In response to low natural gas prices, drilling activity in the Haynesville Shale has been reduced to one rig, and the company expects to release that rig once a well now being drilled is completed, the company said. El Paso is operating a total of nine rigs "with a continued focus on oil programs."

The Eagle Ford Shale, the most active program with four rigs now operating in La Salle County, TX, had a net year-end exit rate of 14,073 boe/d from 64 wells, "as production constraints caused by limited natural gas takeaway have been eliminated with the completion of a natural gas gathering system by El Paso's Midstream Group." An additional hydraulic fracturing crew is to be added by the end of March; a fifth rig is expected later this year. Two rigs now are operating in the Altamont field, one is in the Wolfcamp Shale and one is operating in the South Louisiana Wilcox play.

Proved reserves jumped 19% year/year to 4 Tcfe fro 3.4 Tcfe. Total reserves of oil and condensate and natural gas liquids grew by almost 66% to 201 million bbl from 121 bbl. The reserve replacement ratio was 400%. Domestic reserve replacement costs, before acquisitions and price-related revisions, were $1.41/Mcfe. The company's risked future drilling inventory at the end of 2011 was 9.7 Tcfe, up from 8.0 Tcfe in 2010. The risked future drilling inventory includes about 2 Tcfe of proved undeveloped reserves and 7.7 Tcfe of risked unproved resources.

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