Several top investment banks and private equity firms are said to be partnering on a bid for the exploration and production (E&P) assets of Dominion Resources, sources said last week. The leveraged buyout could top $15 billion.

The Wall Street Journal first reported last week that Goldman Sachs and Morgan Stanley were leading a consortium of private equity firms that include Carlyle Group, First Reserve, Madison Dearborn Partners and Warburg Pincus to buy the assets of Dominion subsidiary Dominion Exploration & Production Inc. Another private equity group, which is said to include Blackstone Group LP, Texas Pacific Group and Kohlberg Kravis Roberts & Co. also is considering an offer.

Dominion E&P is one of the largest independents in the United States. Excluding the Appalachian Basin properties, which are not expected to be sold, proved reserves at the end of 3Q2006 totaled 5.5 Tcfe. Average daily production, excluding the Appalachian assets, totaled 1,175 MMcfe/d.

Dominion’s reserves are located in the deepwater Gulf of Mexico, West Texas, the Midcontinent, the Rockies and the Western Canadian Sedimentary Basin. About 76% of the reserves are natural gas.

“The premier quality of our [E&P] reserves and operations is expected to produce significant interest among potential bidders,” Dominion CEO Tom Farrell said last year when the sale was announced (see NGI, Nov. 6, 2006). “It is rare that a business of this size and quality becomes available.”

The asset sale auction is scheduled to begin in mid-February, with completion by mid 2007. However, according to reports, a private equity offer may be completed before the auction process begins.

Dominion is selling the volatile E&P business to refocus on its utility operations, which are the second largest in the United States after Exelon Corp.

“Following a sale, our remaining E&P reserves of about 1.1 Tcfe would fit well geographically and operationally with our natural gas pipeline, storage and gathering businesses,” Farrell said last November. The Appalachian assets, which would bolster Dominion’s storage and utility operations, “have a risk profile more consistent with the risk profile of Dominion’s other businesses.”

The company also is reviewing whether to sell other nonstrategic assets, which may include local distribution companies and power plants, Farrell said last year. The company owns about 7,800 miles of natural gas pipeline and the nation’s largest natural gas storage system, with about 950 Bcf of storage capacity. The portfolio also includes about 28,100 MW of power generation and 6,000 miles of electric transmission lines.

No private equity group has attempted a target as large as Dominion, according to The Journal. “A deal would rival such recent energy acquisitions as Anadarko Petroleum Corp.’s $16.4 billion purchase of Kerr-McGee Corp. last year and Chevron Corp.’s $18 billion acquisition of Unocal Corp. in 2005,” the newspaper noted.

Energy analysts said buyers of the E&P assets may be betting that energy prices will not continue to fall substantially. In any case, spreading the bid among several institutional buyers would reduce the risks.

“The fact that they [banks and equity firms] are out looking at physical assets is part of the normal trend,” energy analyst Daniele Seitz of Dahlman Rose & Co. wrote in a note.

Investment bankers and private equity players have been moving into the E&P market on a large scale in the past few years. Goldman is part of a private consortium that is buying out Kinder Morgan Inc. (see related story). Morgan Stanley also is increasing its stake in oil and gas; last year it acquired TransMontaigne, a petroleum products marketer.

Even small asset purchases are becoming more common. Last week, a subsidiary group of Merrill Lynch & Co. Inc. invested $150 million into privately held Leor Exploration & Production LLC, giving it an undisclosed stake in the Houston-based producer. Leor is targeting natural gas in the Deep Bossier trend of Texas and Louisiana.

Dominion has “assets of tremendous quality and they should attract many interested buyers,” said Seitz.

When the sale was first announced, financial analysts estimated Dominion might obtain $10 billion for the assets. Last week, analysts were betting on a much higher return.

Seitz estimated Dominion might fetch as much as $18 billion for the E&P properties. Deutsche Bank’s John Kiani estimated the assets were worth about $15.5 billion, based on recent transactions for reserves in similar gas-producing regions. Banc of America Securities analyst Shelby Tucker agreed; he wrote in a note to clients the asset sale could bring $15.3 billion.

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