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

“The company is in the best shape ever, both from a financialand operating viewpoint, and our board believes the shareholders’interests will best be met at this time as a stand-alone companywith an increased focus on core upstream operations,” said CEOGeorge P. Mitchell. “With a drilling backlog of over 1,200development locations and significant additional potential, we planto increase natural gas production more than 10% annually for theforeseeable future. Based on current energy price futures,management expects the highest annual earnings this year in thecompany’s history, which would exceed current consensus analystestimates by more than 30%.”

Mitchell had hired Goldman Sachs & Co. and Chase SecuritiesInc. to help weigh strategic alternatives, including a sale ormerger. At the time, Sanders Morris energy analyst John Olson saidMitchell could go for $30 a share or better. Olson yesterday toldNGI he wouldn’t rule out a negotiated deal for Mitchell somewheredown the road while he painted a rosy picture for the company goingforward.

“I would tell you this, that Mitchell’s outlook got so muchbetter over the course of the seven-month search for a partner thatit became very apparent that their outlook was improving sharplywhile the stock prices of the prospective bidders were either goingsideways or down, and this created the affordability issue,” Olsonsaid. “Mitchell is, to my understanding, probably the mostprofitable company in the oil and gas industry at large. It’smaking 25 to 30% returns on equity and has been de-leveragingsteadily, and Wall Street estimates of the company’s outlook havebeen rising sharply.”

Olson’s rating on Mitchell has been a “strong buy,” and he saidearnings estimates are going up to about $2.25 from $1.80, and thestock is trading now at about nine to 10 times earnings.

“Mitchell produces the richest gas in the country. It’stypically 1,300 Btu gas and has developed an entirely new vintageof wells in old fields in the Fort Worth Basin… Their oil and gasreserves and natural gas reserves both were up about 28% lastfiscal year.” In addition, gas gathering volumes are likely to riseabout 15 to 20%, Olson said.

Mitchell’s board has approved a plan to combine the company’sClass A and Class B shares into a single voting class, expected tobe effective in late June after shareholder approval. This shouldimprove liquidity of Mitchell’s stock and eliminate confusion.

Mitchell also began a common stock buy-back program and plans tofurther reduce long-term debt. The effort will be funded fromoperating cash flows which, based on planned growth in productionvolumes and the current energy price outlook, are expected tosubstantially exceed cash needs. Planned cash outlays include a$221 million capital budget, which is 50% higher than last year’sexpenditures.

Share repurchases will be made from time to time in the openmarket, while debt reductions will most likely be in the company’srevolving bank facility. The board has approved repurchases of upto 2.5 million shares. Mitchell also intends to maintain or enhanceits investment-grade debt rating.

“We believe the significant growth potential of our upstream andmidstream businesses, coupled with the share repurchases andreversion to a single class of common stock, will improve thecompany’s future stock price performance, Mitchell said. “No one ismore frustrated than I with the company’s current market valuation,and we will continue to explore ways to increase shareholderreturns.”

Mitchell is one of the nation’s largest independent producers ofgas and gas liquids. “Mitchell is the only company that I am awareof in Texas that can expand its production from 250 MMcf/d now tosomewhere around 450 MMcf/d in the next four years,” Olson said.”Practically all of the growth will be in the Dallas-Ft. Wortharea, 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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