Mitchell Energy Puts Out 'For Sale' Sign

Having pulled out of a stall caused by depressed commodity prices, Mitchell Energy & Development Corp. is flying right again with 12% return on equity in exploration and production, 15 to 20% in gathering and 55 to 60% in natural gas liquids (NGLs), according to one analyst. For Chairman, CEO and gas and oil industry veteran George P. Mitchell, 80, now might be the time to bail out.

The company's board of directors hired Goldman, Sachs & Co. and Chase Securities Inc. to help weigh strategic alternatives, including a sale or merger. Mitchell Energy said it would not comment until a decision is made. "The message is that the 'for sale' sign is out and we're welcoming people to come by and kick the tires," a spokesman said.

John Olson, energy analyst for Sanders Morris and Mundy, said Mitchell could go for $30 a share or better. "Mitchell is capturing an exquisite time to sell assets. All of his businesses are in wonderful shape right now and the profitability of the company has improved substantially.

"The suspects [that could acquire Mitchell] are your usual energy conglomerates, power companies and producers, and big producers, I should say. Mitchell is fairly unique in the sense that almost all of their assets are inside Texas and over half of their gas reserves and the like are in the Fort Worth Basin, which serves the Greater Dallas-Fort Worth market, which is one of the largest gas markets in the country. Texas Utilities, TXU, is the largest buyer of gas in the country." In addition, two gas-fired cogeneration plants are planned for the area, and Mitchell recently revised its gas reserves, upping its holdings by 25%. "And that's probably a conservative rendering because there are so many other opportunities in the Fort Worth Basin."

Mitchell, based in The Woodlands, TX, is one of the country's largest independent gas and gas liquids producers. Primary businesses include gas and oil production and the gathering, processing and marketing of gas and gas liquids. George Mitchell owns 64% of the company's class A (voting) shares and 50.7% of its class B (non-voting) shares.

The company was founded in 1946 as a small wild-catting firm in Houston. In fiscal 1999, ending Jan. 31, Mitchell produced 94 Bcf gas, 17.5 million barrels of liquid hydrocarbons (gas liquids, oil and condensate) and replaced 185% of its gas and oil production. At year-end 1998, Mitchell's proved reserves totaled 867 Bcf gas and 155 million barrels of liquid hydrocarbons. The company has about 875 full-time employees.

Mitchell claims it is well positioned to take advantage of the current upturn in energy prices. The company has a development backlog of 1,000 wells, an attractive 3-D seismic prospect inventory, quality gathering and processing operations and a sound cost structure.

However, in June at Mitchell's 1999 annual meeting, George Mitchell conceded the company had experienced its share of turbulence. ".[T]he bottom fell out for oil and NGL prices during the third quarter, and we were faced with some of the lowest prices seen in the last 20 years. I don't think I need to dredge up all the gory details, but we were forced to take some painful actions to ensure the profitability of our company." Mitchell was referring to a downsizing and restructuring, completed in February, that slashed 235 jobs for a 21% reduction in total employment. Also in February, Mitchell said its fiscal 2000 capital budget of $137 million represented a 33% reduction from the $205 million spent in the prior year, excluding asset acquisitions.

At the June meeting, Mitchell conceded his company was trading at a multiple to cash flow significantly lower than its peers. "While we can't explain this difference, it may be due in part to the erroneous assumption that growth can only be achieved through mergers and acquisitions. With our current backlog of 1,000 development drilling wells, we think that we have plenty of opportunity to grow."

Mitchell's shares are traded on the New York and Pacific stock exchanges under the symbols MNDA (voting) and MNDB (non-voting). Wednesday Mitchell voting shares closed at $23.75, up 81 cents. The stock's 52-week range is $9.63 to $24.44. Non-voting shares closed at $23.13, up $1.25. The stock's 52-week range is $9.88 to $23.69.

Helping to clear the way for the potential sale of Mitchell is the recent ruling in favor of the company relating to lawsuits that claimed its drilling activities polluted North Texas water wells. Previously, Mitchell sold the planned community real estate development north of Houston known as The Woodlands.

Following service as a captain in the Army Corps of Engineers during World War II, George Mitchell joined a newly formed wild-catting company, first as a consulting geologist and engineer and later as a partner. He was named president in 1959 and has guided the company since. George Mitchell has participated in about 8,000 wells, including more than 1,000 wildcats. He and the company have made upwards of 200 oil and 350 gas discoveries.

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