Enron Corp. notified the Securities and Exchange Commission lastweek it is considering an unsolicited offer from an unidentifiedcompany for its 53.5% share of Enron Oil and Gas, one of thelargest independent gas producers in the U.S. According to thesolicitation, the third party would acquire Enron’s shares in EOGand make an offer for all the outstanding shares. It also wouldrequire that Enron dispose of certain other assets.

While trying not to minimize the offer, an Enron spokesman didsay it was among many such offers the company receives for itsinterests in assets. Most offers go unreported. But because Enronowns a majority share in EOG, it had to report the offer.

“Seems like they wouldn’t have filed that 13 D [with the SEC] ifthis wasn’t a good enough offer,” noted Mike Cha of J. P. Morgan.”If they can get a good price for the stock, it’s a goodopportunity to get out of a business they may have been trying toget out of for a while,” he said.

“They’ve always been looking for some way to make it a moreliquid investment, but I think also they are considering whetherthey should even be in the E&ampP business,” said another observerwho requested anonymity. “When you look at it over time, the E&ampPbusiness basically destroys value. It’s not a value creationindustry. EOG hasn’t really made them money in the last 10 years.They had problems four years ago, then three years ago and thenagain two years ago, and every year they have said the problemswere over and they would show up again the next year. It was alwaysa good subsidiary to dump their hedging losses. They took a lot ofonetime losses.”

Enron formed Enron Oil &amp Gas in 1987 from its existingInterNorth and Houston Natural Gas units. It maintained fullownership until 1989, when it spun off a portion to the public toraise $200 million.

EOG has had great success building reserves and replacingproduction. In 1997, it replaced 220% of production, including 194%through drilling additions. It also has an attractive set ofassets, including more than 4.5 Tcfe of gas and oil reserves. Itfocuses on the U.S., Canada, Trinidad and India. About 69% of itsreserves are in North America while the rest are overseas, andabout 85% of its reserves are natural gas while 15% are oil. In thethird quarter, Enron Oil &amp Gas produced 1.02 Bcf/d of gas and31,600 b/d of oil. However, the company reported third quarter 1998net income of $5.9 million, or $.04 per share, compared to netincome of $31.2 million, or $.20 per share, for the comparableperiod a year prior. The decrease in earnings was attributable tolower prices for both natural gas and crude oil, the company said.Earnings of $122 million, or $0.78 per share, in 1997 compared with$140 million, or $0.88 per share, in 1996, were below originalexpectations primarily because of natural gas hedging losses. Netincome would have been a record $158 million had it not been forthe hedging transactions which primarily affected earnings for thefirst quarter of 1997.

Donato Eassey of Merrill Lynch said Enron’s decision to sell EOGwill “boil down to price and value and what it would take them toreplace that cash flow and earnings power. EOG is a cash-flowbusiness. It would be kind of odd if they sold it. They justincreased their own ownership in that company not long ago.

“I would think they would consider it [if the offer was in thelow $20s/share].” EOG has a market value of $2.52 billion. EOGshares rose $2.63 on the news late Tuesday last week following theannouncement, to close the day at $15.50 a share. On Wednesday itsshares inched up another 6% to close at $16.38. By Friday, shareprices were more than $17.

Cha agreed Enron probably would consider an offer in the low$20s, particularly if it included a combination of cash and stockin an attractive company. “Earlier this year their stock had hitthe low-$20s and they said it was way under-valued, which probablymeant they wanted high-$20s or low-$30s. Now it’s a different worldso maybe the low-$20s is what they could price it at.”

Eassey said proceeds would be “additive in terms of thecompany’s financial flexibility” because Enron already has afinancing plan in place for the international water company itformed during the summer. In July, Enron announced the formation ofa global water business, called Azurix, to own and operatestrategic water and wastewater assets, develop relatedinfrastructure, and extend critical risk management and financeskills into the international water market. As a key step inestablishing the business, Enron announced an offer for WessexWater Plc, a water and wastewater company in the south west ofEngland. That transaction is scheduled to close this month.

Enron also plans to invest more than $100 million in Brazil in1999 to expand its local business and announced last week it plansto invest $300 million in a gas distribution joint venture in SouthKorea.

Rocco Canonica

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