A big shift in strategy led Equitable Resources to put some ofits most prized Gulf Coast midstream assets on the auction blocklast week. The company announced it is selling the 1,900-mileLouisiana Interstate Gas pipeline (including a 500 MMcf/dDepartment of Energy oil line it converted to transport naturalgas), the 3.6 Bcf capacity Jefferson Island salt dome storageproject and its gas and power marketing operation. The gasmarketing operation sold 500 Bcf of gas in 1997.

The move was not a surprise to a marketplace that has seennumerous midstream assets sold for lofty prices over the past twoyears. Only two weeks ago, Aquila Gas Pipeline announced it was upfor sale, and analysts put a price tag on it worth 10 timesearnings before interest, taxes, depreciation, and amortization, orabout $750 million. Other recent sales have drawn in up to 14 timesEBITDA. The attractive market for these assets may be behind thesale, but some observers have other ideas.

“This could be the beginning of the liquidation of EquitableResources as best we can tell,” said Merrill Lynch analyst DonatoJ. Eassey. “This was supposed to be a strategic asset for them whenthey purchased it and they enhanced it with the [67-mile] DOE line.

“There’s two schools of thought: one is they’re starting theliquidation process with these assets and then will move on toE&P and ultimately end with distribution. Another thing is theymay have enhanced the value enough with the DOE line and theJefferson Island Storage and LIG that it may be of higher value tosomebody else more so than what they could get over time. It’s oneof those. Without a CEO and CFO it’s anybody’s guess right now,”noted Eassey. “It’s been a long time since they tried to hire aCEO. They haven’t been very successful in doing that.”

Former CEO Fred Abrew took an “early retirement” last July.Donald I. Moritz, chairman of the executive committee of the board,became ERI’s interim CEO. But the company has had a tough timetrying to find someone to permanently lead such a “complexcompany,” one with E&P, midstream, gas distribution, energyservices and several other businesses, said Bob Atkinson,Equitable’s director of investor relations.

“Certainly the search for a new CEO has gone on beyond whatwould be considered a normal time-frame,” Atkinson admitted. “I canonly attribute it to the fact that the search committee is lookingto find just the right person.. It should not be inferred that thisis the beginning of the end. I think the board thought a new CEOwould view this as a positive action.”

The board is following through on a previously disclosedstrategic review process, started about the time Abrew left lastsummer, said Atkinson.

“We have significantly added to the value of these midstreamoperations during the past three years,” said Moritz. “Today, weare focused on further development of our exploration andproduction, utilities and energy services businesses.”

Equitable bought LIG from Arkla in 1993 for what many observersconsidered a high price, $191 million, and last year paid the DOE$22 million for its Louisiana oil pipeline, which was laterconverted to flow gas. LIG transported 113 Bcf last year, down from120 Bcf in 1996. The LIG system has more than 100 connections withother pipelines and access to Louisiana’s major industries and gasmarkets. LIG is also in the process of expanding one of its liquidsprocessing plants to accommodate additional contract processingvolumes.

Equitable developed the Jefferson Island salt dome, whichconnects to LIG and the DOE system, as well as the Henry Hub. Thestorage facility is capable of 180 MMcf/d of injections and 360MMcf/d of withdrawals and is scheduled for an expansion that willdouble its size and capabilities by summer of 1999. The Supply andTrading company traded 500 Bcf of gas in 1997 and an”insignificant” amount of power. Power marketing “has not been aprofitable portion of the marketing company’s activity,” Atkinsonsaid, adding “but I don’t know if anybody is making any money onwholesale electricity right now.”

Atkinson said when Equitable acquired LIG and developedJefferson Island, its intention was to involve Equitable in “everypiece of the transaction as the Btu of energy moved from the sourceto our customer. The midstream assets were supposed to help us dothat, but the competitive situation and other considerations havebrought us to the conclusion that Equitable can derive greatermargin and most likely a greater return on our invested capital bylooking at those businesses where we think we have a competitiveadvantage..”

In 1996, Equitable also decided to exit the western E&Pbusiness, selling oil and gas properties for $170 million. “We hadnew management come into place who came to the conclusion that anE&P operation of our size and risk tolerance could not haveproperties as far flung as we had then, and that it was moreprudent to concentrate our activities. Dance with who brung you, soto speak, in terms of focusing on development of our gas reservesin the Appalachian basin and looking for potential upside in termsof new discoveries and added production in the offshore Gulf. Thatpart of the strategy has been implemented and seems to be verysuccessful so far,” he said.

“We are going to remain in the Gulf Coast area head, hands andfeet in terms of our exploration and production activities andwe’ll continue to exploit where we have a significant gas and oilreserve in the Appalachian basin. Our downstream activities willlargely be focused where they are now in the Northeast and MidAtlantic states. We still have Equitrans [pipeline] in WestVirginia and Pennsylvania and our gathering system in Kentucky andVirginia. But we are exiting the midstream business in the GulfCoast area.”

The company would not confirm that it has a buyer for the assetsbut Atkinson said there “was a reason” for disclosing in a 10Q SECfiling last March its intentions to sell the properties. “I thinkthere is pent up demand for these assets. Regional players as wellas some national gathering and processing companies may bepotential buyers,” he said. The sale of the Gulf Coast midstreamoperations could take place as early as the third quarter of 1998.

Equitable’s share price rose $1.56 on the news Friday to closeat $33.50/share on a heavy trading volume of 204,000.

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