Dominion agreed to sell its offshore natural gas and oil exploration and production (E&P) operations to a subsidiary of Italy’s Eni SpA for $4.76 billion. The operations, which will nearly triple Eni’s output in the Gulf of Mexico (GOM), include 967 Bcfe of proved gas and oil reserves on the shelf and in deepwater with average daily output of 503 MMcfe/d.
Eni’s GOM production will jump to 110,000 boe/d from 36,000 boe/d by the second half of this year, the company said. The deal also will increase Eni’s proved and probable reserves by 222 MMboe. Eni is one of Europe’s top five E&P companies by market value, and it was the only leading producer to boost production last year with a 1.9% increase.
Eni CEO Paolo Scaroni said the purchase is part of Eni’s strategy to buy reserves and production in key areas where the company can apply its deepwater skills and technologies. The assets will give Eni “the necessary critical mass for its activities in the Gulf of Mexico.”
The Italian producer has operated in the United States since 1966. Eni currently holds stakes in 242 leases in the GOM and 151 leases in Alaska.
Dominion CEO Thomas F. Farrell II called Monday’s announcement “a significant step in Dominion’s previously announced strategic plan to refocus on the power generation and energy distribution, transmission, storage and retail businesses. Dominion has been extremely successful in the E&P business, but that success has not been fully reflected in our share price. Our plan is designed to realize the value of these assets for our shareholders.”
The sale of the offshore E&P assets to Eni Petroleum Co. is expected to close by early July, subject to customary closing conditions and adjustments.
Dominion announced last November that it would pursue the sale of most of its E&P assets as part of a strategic refocusing (see Daily GPI, Feb. 1; Nov. 2, 2006). The move is designed to enhance the long-term value of the company by realigning Dominion’s operations and risk profile more closely with the company’s peer investment group of utilities. The company is still in the process of selling all of its U.S. onshore E&P operations, except properties in the Appalachian Basin, as well as its E&P operations in Western Canada. Dominion said it would make more announcements in the “near future.”
Dominion plans to retain its low-risk E&P operations in the Appalachian Basin because of their value to the company’s natural gas pipeline, storage and gathering businesses. The Appalachian properties account for 15% of proved reserves and 8% of Dominion average daily production at year-end 2006. Production from these reserves is expected to contribute less than 5% of Dominion’s future consolidated operating earnings.
With additional announcements yet to come, some information related to the asset sale to Eni is not ready for disclosure, including total proceeds, applicable tax rate, targeted credit metrics in view of recent legislative changes in Virginia and, ultimately, the amount of proceeds that will be available to repurchase shares of common stock, Dominion said.
“We suggest that investors wait for all of these announcements before drawing any firm conclusions on how these transactions will affect Dominion’s ongoing earnings power,” Farrell said.
The company in March completed the sale of three natural gas-fired generating facilities. It also is in the process of selling its Dominion Peoples and Dominion Hope natural gas distribution companies, with closing targeted for the end of 2Q2007.
Proceeds of the asset dispositions would position the company to reduce debt — including debt at its CNG subsidiary — repurchase common shares and grow other Dominion businesses. Including the Appalachian Basin E&P assets, Dominion expects its remaining businesses to grow consolidated operating earnings per share at an average annual rate of 4-6%.
Dominion is being advised in the sale by the investment banking firms of JPMorgan, Lehman Brothers and Juniper Advisory LP. BakerBotts LLP and McGuireWoods LLP are the company’s legal advisers for the sale.
Eni’s purchase price of around $18/boe is considered high by analysts. However, the price is close to the deal Norsk Hydro (now merged with Statoil) made in 2005 when it bought Spinnaker Exploration (see Daily GPI, Sept. 20, 2005).
Banc of America Securities analyst Shelby G. Tucker said the sale price was well above the $3.2-3.6 billion range he had estimated for the offshore assets. However, the transaction would be a boon for Dominion — the bank’s analysts had previously said that for every $500 million difference from the estimated sale price, Dominion’s estimated stock value would change by $1 per share.
“Thus, if the sale price for the remainder of the E&P assets is in line with our estimates, this could add $2/share to Dominion’s valuation,” Tucker wrote in a research report.
“Strategically this acquisition makes good sense, enhancing Eni’s presence in a major hydrocarbon basin, with upside potential, under a benign fiscal regime,” Citigroup analysts wrote in a note to clients.
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