Enron Considers Selling E&P Unit
Enron Corp. notified the Securities and Exchange Commission last
week it is considering an unsolicited offer from an unidentified
company for its 53.5% share of Enron Oil and Gas, one of the
largest independent gas producers in the U.S. According to the
solicitation, the third party would acquire Enron's shares in EOG
and make an offer for all the outstanding shares. It also would
require that Enron dispose of certain other assets.
While trying not to minimize the offer, an Enron spokesman did
say it was among many such offers the company receives for its
interests in assets. Most offers go unreported. But because Enron
owns a majority share in EOG, it had to report the offer.
"Seems like they wouldn't have filed that 13 D [with the SEC] if
this wasn't a good enough offer," noted Mike Cha of J. P. Morgan.
"If they can get a good price for the stock, it's a good
opportunity to get out of a business they may have been trying to
get out of for a while," he said.
"They've always been looking for some way to make it a more
liquid investment, but I think also they are considering whether
they should even be in the E&P business," said another observer
who requested anonymity. "When you look at it over time, the E&P
business basically destroys value. It's not a value creation
industry. EOG hasn't really made them money in the last 10 years.
They had problems four years ago, then three years ago and then
again two years ago, and every year they have said the problems
were over and they would show up again the next year. It was always
a good subsidiary to dump their hedging losses. They took a lot of
Enron formed Enron Oil & Gas in 1987 from its existing
InterNorth and Houston Natural Gas units. It maintained full
ownership until 1989, when it spun off a portion to the public to
raise $200 million.
EOG has had great success building reserves and replacing
production. In 1997, it replaced 220% of production, including 194%
through drilling additions. It also has an attractive set of
assets, including more than 4.5 Tcfe of gas and oil reserves. It
focuses on the U.S., Canada, Trinidad and India. About 69% of its
reserves are in North America while the rest are overseas, and
about 85% of its reserves are natural gas while 15% are oil. In the
third quarter, Enron Oil & Gas produced 1.02 Bcf/d of gas and
31,600 b/d of oil. However, the company reported third quarter 1998
net income of $5.9 million, or $.04 per share, compared to net
income of $31.2 million, or $.20 per share, for the comparable
period a year prior. The decrease in earnings was attributable to
lower prices for both natural gas and crude oil, the company said.
Earnings of $122 million, or $0.78 per share, in 1997 compared with
$140 million, or $0.88 per share, in 1996, were below original
expectations primarily because of natural gas hedging losses. Net
income would have been a record $158 million had it not been for
the hedging transactions which primarily affected earnings for the
first quarter of 1997.
Donato Eassey of Merrill Lynch said Enron's decision to sell EOG
will "boil down to price and value and what it would take them to
replace that cash flow and earnings power. EOG is a cash-flow
business. It would be kind of odd if they sold it. They just
increased their own ownership in that company not long ago.
"I would think they would consider it [if the offer was in the
low $20s/share]." EOG has a market value of $2.52 billion. EOG
shares rose $2.63 on the news late Tuesday last week following the
announcement, to close the day at $15.50 a share. On Wednesday its
shares inched up another 6% to close at $16.38. By Friday, share
prices were more than $17.
Cha agreed Enron probably would consider an offer in the low
$20s, particularly if it included a combination of cash and stock
in an attractive company. "Earlier this year their stock had hit
the low-$20s and they said it was way under-valued, which probably
meant they wanted high-$20s or low-$30s. Now it's a different world
so maybe the low-$20s is what they could price it at."
Eassey said proceeds would be "additive in terms of the
company's financial flexibility" because Enron already has a
financing plan in place for the international water company it
formed during the summer. In July, Enron announced the formation of
a global water business, called Azurix, to own and operate
strategic water and wastewater assets, develop related
infrastructure, and extend critical risk management and finance
skills into the international water market. As a key step in
establishing the business, Enron announced an offer for Wessex
Water Plc, a water and wastewater company in the south west of
England. That transaction is scheduled to close this month.
Enron also plans to invest more than $100 million in Brazil in
1999 to expand its local business and announced last week it plans
to invest $300 million in a gas distribution joint venture in South