Enron Tells Enron Oil & Gas: You're On Your Own, Kid
Enron and subsidiary Enron Oil & Gas (EOG) set a plan in
motion Tuesday to formally part ways, as the two agreed on a
transaction that would establish EOG as a widely held public
company that will be independent of Enron. Under the all-stock
agreement, Enron will exchange 62.27 million of its 82.27 million
shares of EOG common stock for EOG's China and India operations. In
connection with the exchange, EOG will contribute $600 million in
cash to one of EOG's India subsidiaries that will be transferred to
The net effect of the share settlement agreement will reduce
Enron's ownership share of EOG from approximately 82.27 million
shares or 53.5 %, to 20 million shares, or between 16-17%. Once the
deal is closed, the EOG board of directors will be reconstituted,
with all Enron officers and directors currently serving as EOG
directors, resigning their positions on the EOG board.
"While EOG's North American operations are among the best in the
industry, they are no longer strategic to Enron's North American
energy businesses, as we have ready access to gas supplies in this
well-developed market. The China and India operations provide
valuable supplies to meet growing energy demand in these regions
and are very strategic to our international activities," said
Kenneth L. Lay, Enron CEO.
EOG will issue additional equity to fund the $600 million part
of the transaction. The Bank of America committed to give EOG a
senior credit facility of up to $1.3 billion, which could also be
used to fund the transaction.
"We expect the transaction to be immediately accretive to cash
flow per share,'' said EOG Chairman Forrest E. Hoglund. "The
transaction also will remove the uncertainty of our ownership
status and will provide EOG with greater access to both debt and
equity capital with which to grow its businesses. We are extremely
excited about our platform for growth in North America and Trinidad
and will continue to seek new international concessions."
Solving the uncertain ownership issue is a coup for EOG, said
Steve Smith, an analyst with Dain Rauscher Wessels. "The overhang
of this (ownership) issue had been a depressant on company
management, employees and shareholders. I mean, here's a company
that went up for sale, but nobody came to the party. The resolution
is a positive development." Smith estimated the deal will cause a
16% improvement in cash flow for EOG in 2000.
Another result of this transaction will be a more active EOG,
Smith said. "When another company has 53% of your stock,
maneuverability in terms of deal-making becomes difficult. Now that
it has more freedom, I look for it to enter into an 'explore and
exploit' deal in the Gulf of Mexico, similar to the deal Apache
made with Shell some months ago (See Daily GPI, April 30)."
The transaction has been approved by the boards of both
companies and has been recommended by a special committee of
independent directors of the EOG board. The transaction, which is
expected to be completed by Aug. 31, does not require any
"It is just a strategic move for us to get out of the North
American market," said Enron spokesperson Karen Denne. "Now we can
put the resources we normally spend on EOG into new and developing
The assets in India and China are examples of Enron's new
direction, Denne added. When the deal with EOG closes, Enron will
have 30% interest in three Indian energy fields (one gas field, one
oil field, and one oil and gas field), as well as a production
sharing agreement with the Chinese government for the Sichuan field
Zach Wagner, an analyst with Edward Jones, said the overseas
assets were the key aspect of the deal. "India has a growing energy
market, and Enron has been trying to establish a firm foothold in
India for quite some time. These assets add major long-term
potential to Enron's portfolio."
The price was also right, according to Wagner. "Enron did not
overpay at all. Judging by EOG's current stock price, Enron is
giving up around $1.2 billion, but getting back $600 million and
valuable assets as well."
Both Wagner and PaineWebber analyst Ron Barone said this move
also makes sense for Enron because it reduces its exposure to the
mature North American energy market. "For all intents and purposes,
Enron will effectively be out of the domestic exploration and
production (E&P) business by year-end," Barone said,
"ultimately having greatly reduced long-term commodity price risk."
The deal contained a lock-up period where Enron cannot sell its
remaining 20 million shares of EOG for six months. Enron does,
however, have the right to sell 10 million in convertible
securities, which will be automatically exchangeable into EOG
shares. Barone said Enron will have all 20 million shares sold
shortly after the lock-up period ends.