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Copano Seeking Growth From Producer Momentum, 'Bolt-On' Deals

Houston-based midstream player Copano Energy LLC posted second quarter net income that was 74% greater than the year-ago period, $23.2 million (40 cents/unit) compared to $13.3 million (31 cents) a year ago. Credited for the improvement are abundant gas supplies and favorable commodity prices.

Production momentum of the producers Copano serves and the company's "optimism for potential bolt-on acquisitions" make larger acquisitions unnecessary for the company to continue growing its distributions to unitholders and reach its objectives, CEO John Eckel told financial analysts during a conference call last Thursday.

"While we carefully evaluate potential opportunities as they are presented to us, it remains our view that any strategic acquisition would have to be particularly compelling and highly accretive in order to proceed," he said. "Given current capital market conditions on the one hand and the considerable opportunities and outlook for Copano's existing business on the other, we believe it would be difficult for acquisition numbers to work until capital market conditions improve."

When asked in which producing region -- Texas, Oklahoma, the Rocky Mountains -- he saw the greatest opportunities, Eckel said the question was like asking someone to pick his favorite child.

"I think there are excellent opportunities in each of the regions right now," Eckel said. "There's a lot of activity in Texas, even historic areas where we've had some of our original operating areas, people are drilling wells and having amazing amounts of pay...It's very exciting potential; we'll see how it drills out. We have a new team focused on the Rocky Mountains. They're seeing a lot of deal flow. And our Oklahoma team continues to develop an excellent portfolio of opportunities."

Copano's revenue for the second quarter of 2008 increased 78% to $501.3 million compared with $281.7 million for the second quarter of 2007. Copano's operating segment gross margin increased 70% to $89.6 million compared to $52.6 million in the second quarter of 2007. Total segment gross margin, which includes costs associated with Copano's hedging program of $17.5 million, increased 55% to $72.1 million for the second quarter of 2008 from $46.4 million for the second quarter of 2007.

During the second quarter of 2008 gross margin for the company's Oklahoma segment increased 79% to $47.9 million compared to $26.8 million for the second quarter of 2007, primarily from increased pipeline and processing volumes and increases in commodity prices. The Oklahoma segment gathered an average of 228,941 MMBtu/d, processed an average of 155,430 MMBtu/d and produced an average of 15,465 b/d of natural gas liquids (NGL) at its plants and third-party plants during the second quarter of 2008, representing increases of 15%, 8% and 9%, respectively, compared to the second quarter of 2007.

Gross margin for the Texas segment increased approximately 57% in the second quarter to $40.5 million compared to $25.8 million for the second quarter of 2007, primarily from increased pipeline and processing volumes and increases in gas liquids prices. The Texas segment provided gathering, transportation and processing services for an average of 700,545 MMBtu/d during the second quarter, compared with 650,798 MMBtu/d for the second quarter of 2007, an increase of 8%. The Texas segment gathered an average of 313,523 MMBtu/d, processed an average of 629,334 MMBtu/d and produced an average of 17,721 b/d of NGL at its plants and third-party plants during the second quarter of 2008, representing increases of 7% and 9% for gathering and processing, respectively, and a 2% decrease in production of NGL as compared to the second quarter of 2007.

Gross margin attributable to the producer services business in Copano's Rocky Mountains segment was $1.2 million for the second quarter of 2008. For the second quarter of 2008, producer services throughput averaged 229,513 MMBtu/d, which represents volumes purchased for resale, volumes gathered utilizing firm capacity gathering agreements with Fort Union and volumes transported under firm capacity transportation agreements with Wyoming Interstate Gas Co. (WIC), or using additional capacity that the company obtains on WIC. The Rocky Mountains segment results and volumes do not include the results and volumes associated with Copano's interests in Bighorn and Fort Union, which are accounted for under the equity method of accounting. For the second quarter of 2008, average pipeline throughput for Bighorn and Fort Union totaled 217,373 MMBtu/d and 727,688 MMBtu/d, respectively.

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