Forget Selling; Mitchell Turns to Drilling
Mitchell Energy & Development Corp.'s view of the future looked so good
from the auction block, the company decided to step down and aggressively
grow its gas production. Mitchell had put out the 'for sale' sign in early
October (see NGI Oct. 11).
"The company is in the best shape ever, both from a financial
and operating viewpoint, and our board believes the shareholders'
interests will best be met at this time as a stand-alone company
with an increased focus on core upstream operations," said CEO
George P. Mitchell. "With a drilling backlog of over 1,200
development locations and significant additional potential, we plan
to increase natural gas production more than 10% annually for the
foreseeable future. Based on current energy price futures,
management expects the highest annual earnings this year in the
company's history, which would exceed current consensus analyst
estimates by more than 30%."
Mitchell had hired Goldman Sachs & Co. and Chase Securities
Inc. to help weigh strategic alternatives, including a sale or
merger. At the time, Sanders Morris energy analyst John Olson said
Mitchell could go for $30 a share or better. Olson yesterday told
NGI he wouldn't rule out a negotiated deal for Mitchell somewhere
down the road while he painted a rosy picture for the company going
"I would tell you this, that Mitchell's outlook got so much
better over the course of the seven-month search for a partner that
it became very apparent that their outlook was improving sharply
while the stock prices of the prospective bidders were either going
sideways or down, and this created the affordability issue," Olson
said. "Mitchell is, to my understanding, probably the most
profitable company in the oil and gas industry at large. It's
making 25 to 30% returns on equity and has been de-leveraging
steadily, and Wall Street estimates of the company's outlook have
been rising sharply."
Olson's rating on Mitchell has been a "strong buy," and he said
earnings estimates are going up to about $2.25 from $1.80, and the
stock is trading now at about nine to 10 times earnings. "Mitchell
produces the richest gas in the country. It's typically 1,300 Btu
gas and has developed an entirely new vintage of wells in old
fields in the Fort Worth Basin... Their oil and gas reserves and
natural gas reserves both were up about 28% last fiscal year." In
addition, gas gathering volumes are likely to rise about 15 to 20%,
Mitchell's board has approved a plan to combine the company's
Class A and Class B shares into a single voting class, expected to
be effective in late June after shareholder approval. This should
improve liquidity of Mitchell's stock and eliminate confusion.
Mitchell also began a common stock buy-back program and plans to
further reduce long-term debt. The effort will be funded from
operating cash flows which, based on planned growth in production
volumes and the current energy price outlook, are expected to
substantially exceed cash needs. Planned cash outlays include a
$221 million capital budget, which is 50% higher than last year's
Share repurchases will be made from time to time in the open
market, while debt reductions will most likely be in the company's
revolving bank facility. The board has approved repurchases of up
to 2.5 million shares. Mitchell also intends to maintain or enhance
its investment-grade debt rating.
"We believe the significant growth potential of our upstream and
midstream businesses, coupled with the share repurchases and
reversion to a single class of common stock, will improve the
company's future stock price performance, Mitchell said. "No one is
more frustrated than I with the company's current market valuation,
and we will continue to explore ways to increase shareholder
Mitchell is one of the nation's largest independent producers of
gas and gas liquids. "Mitchell is the only company that I am aware
of in Texas that can expand its production from 250 MMcf/d now to
somewhere around 450 MMcf/d in the next four years," Olson said.
"Practically all of the growth will be in the Dallas-Ft. Worth
area, and they won't have to sell any gas outside of Dallas or Ft.
Worth. It's that good a situation."
Joe Fisher, Houston