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Cash From Energen's Utility Sale Bound for Permian

With the sale of utility Alabama Gas Corp. (Alagasco) to the Laclede Group inc., Permian-focused Energen Corp. will have after-tax proceeds of about $1.1 billion to cut debt and accelerate drilling in the Permian Basin, said James McManus, CEO of the newly pure-play exploration and production (E&P) company, during a Monday conference call.

Laclede is buying Alagasco in a $1.6 billion deal. After-tax proceeds are estimated to be $1.1 billion, after consideration of accelerated intangible drilling costs, the company said. "This transaction allows Energen to clarify its corporate structure by becoming a pure exploration and production company, a trend being rewarded by the financial markets," McManus said.

Energen said it plans to use cash proceeds to immediately reduce short-term debt, which will enhance its ability to accelerate drilling and development in the Permian next year and beyond. Through Energen Resources Corp., the company has about 3.3 billion boe of proved, probable and possible reserves and contingent resources as of year-end 2013. About 95% of the company's 346 million boe proved reserves is in the Permian in Texas and in the San Juan Basin in New Mexico and Colorado. 

During the conference call to discuss the deal, McManus did not provide specifics on how much capital spending could be lifted by proceeds from the utility sale. "It's difficult to say at this point," he said. "We don't think that this will impact '14. We've got a lot of delineation work we're doing in '14.

"Where we would look to ramp up is '15...The beauty of this is that we've not got the flexibility to be very under-levered...We've got a lot of opportunities...We're just going to have to look at it as we move forward, but the good news is we do have the capacity to start to pull this inventory forward."

This year the company is focused on delineating the Midland and Delaware basins (see Shale Daily, Aug. 1, 2013), McManus said. What's learned this year is to be applied to stepped-up activity in 2015. "We're having very, very good results all around the board...we just need to know a little bit more information. Once that information becomes known to us in '14, that's going to allow us to really direct our capital in '15. We really wouldn't scale up that much in '14. It does give us some flexibility if we want to do a few more things in '14 as we move through the year. But I think the real year to look at in pressing the pedal to the metal is '15 and beyond."

McManus was asked about the company's activities in the San Juan Basin, where this year it will be participating in some horizontal oil test wells with Williams. "...[I]f that turns out to be a viable play, that could be a place that we look to place some capital in 2015 and beyond," McManus said. "I think that still is an opportunity but more from the oil side than the natural gas side." As far as gas assets in the San Juan, "...we really don't see a lot of potential investment there."

Large acquisitions are not in Energen's plans currently, but smaller additions to acreage where the company is active are a possibility, McManus said.

Wunderlich Securities Inc. analyst Irene Haas reiterated a “buy” rating on Energen in a note Monday and praised its new pure-play status. As a pure play, “...we believe that [Energen] will get more visibility and additional coverage from analysts in the E&P sector, a very positive move,” she wrote.

Alagasco has more than 422,000 customers. The value of the transaction is composed of $1.28 billion in cash and about $320 million of debt. The effective price of the acquisition is $1.34 billion after accounting for the present value of tax benefits to Laclede from the transaction, the utility holding company said.

"Alagasco is an excellent fit for Laclede, and allows us to leverage our combined scale, industry expertise and more than 150 years of experience to drive customer and shareholder value," said Laclede CEO Suzanne Sitherwood. "Now, with Alagasco, our utility customer base increases from approximately 1.13 million to 1.55 million."

Founded in 1857 as The Laclede Gas Light Co., Laclede Group's gas utility segment serves St. Louis and eastern Missouri through Laclede Gas Co. and Kansas City and western Missouri through Missouri Gas Energy, which was acquired by Laclede last year from Energy Transfer partners (see Daily GPI, Sept. 4, 2013).

Alagasco is ideal in terms of size, scope and culture, Laclede said. "By...expanding its footprint beyond Missouri, Laclede builds on the synergies that have come about through the acquisition of Missouri Gas Energy and adds to the scale of its regulated business."

The transaction is expected to close this year, subject to antitrust and regulatory approvals, and be accretive to Laclede net economic earnings during the first year.

The deal is supported by a $1.35 billion bridge facility with Credit Suisse and Wells Fargo Bank NA and includes assumption of $250 million of Alagasco long-term debt as well as assuming or replacing any short-term borrowing at closing. Laclede expects the remaining permanent financing to include issuance of Laclede Group common stock, mandatory convertible securities and long-term debt, as well as the use of corporate cash.

Energen has easily outspent its cash flow within its oil and natural gas operations during the last three years, to the tune of approximately $400-$600 million per year. The company will lose the ~$50-$65 million in annual free cash flow from Alagasco, but the $1.1 billion in after-tax cash proceeds should go a long way to fund operations over the next few years.

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