'For Sale' Sign Comes Down at Mitchell

Things are looking so good for Mitchell Energy & Development Corp. the company has stepped down from the auction block where it has stood since early October (see Daily GPI, Oct. 7).

"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 forward.

"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%, Olson said.

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 expenditures.

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 returns."

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."

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