Bloomberg News

Kinder Morgan’s El Paso Deal Hinges on Production Unit Sale

October 17, 2011

(Updates with comment from analyst in third paragraph, rating downgrade in sixth paragraph.)

Oct. 17 (Bloomberg) -- Kinder Morgan Inc. is counting on finding a buyer for El Paso Corp.’s oil and natural gas production business within six months to help pay off ballooning debt from its $21.1 billion acquisition of the rival pipeline company.

The company’s acreage and production may attract deep- pocketed foreign oil companies such as India’s Reliance Industries Ltd. and Norway’s StatOil ASA, Dan Morrison, senior energy specialist at Global Hunter Securities LLC in Fort Worth, said in an interview today.

“This will put out one of the juiciest acquisition targets we’ve seen on the market for a long time,” Morrison said. “The foreign buyers can certainly pay a premium because they need the operating entity in addition to the assets, and they also generally have a currency advantage as well.”

Chief Executive Officer Richard Kinder plans to have a buyer lined up for the exploration unit by the time Kinder Morgan closes its purchase of El Paso in the second quarter of 2012, he said in a conference call with investors. Evercore Partners Inc. and Barclays Plc already have begun marketing the unit to potential buyers, a person with knowledge of the talks said.

The sale of the exploration unit is important since Kinder needs the proceeds to pay down the debt, Darren Horowitz, an analyst at Raymond James & Associates Inc. in Houston, said.

Quadrupled Debt

Kinder Morgan’s stand-alone debt will increase to $14.5 billion from $3.2 billion, according to a report from CreditSights Inc. issued yesterday. Fitch Ratings Ltd. put Kinder Morgan Kansas Inc., which holds Kinder Morgan’s debt, on a negative ratings watch today, citing the "transactional risk" of the El Paso purchase.

El Paso is among companies that have expanded operations into shale fields that were too expensive to develop until about 10 years ago. Producers are using a combination of horizontal drilling and hydraulic fracturing to crack rock and release the oil and gas. In the past decade, U.S. gas output jumped 11 percent, outpacing a 3.2 percent rise in consumption during the same period.

El Paso owned drilling rights to 46,000 acres in Louisiana’s Haynesville Shale at the end of 2010, according to a filing, and 500,000 acres in the Eagle Ford Shale, Permian Basin and other fields in Texas. It also has 605,000 acres in the Raton Basin coal-bed methane field in New Mexico and Colorado.

Potential Sale Price

The business reported 2010 earnings of $1.1 billion before interest, taxes, depreciation and amortization, said Bruce Connery, a spokesman for El Paso. That would give it a value of about $7.3 billion if it fetches the median multiple of 6.6 times Ebitda for 34 takeovers of U.S. exploration and production companies in the past five years, according to data compiled by Bloomberg.

The unit might reap as much as $9 billion if it sells quickly, said Duane Grubert, an analyst at Susquehanna Financial Group in Stamford, Connecticut. Companies such as Petrohawk Energy and Brigham Exploration have been sold for 16 and 21 times their Ebitda.

Kinder declined to name an asking price for the unit on the conference call.

“They’re going to need all they can get,” said Horowitz, of Raymond James, who rates Houston-based Kinder Morgan at “outperform” and owns none of its stock. “This is a very debt-heavy transaction.”

Shale Attraction

Apache Corp., Hess Corp. and Occidental Petroleum Corp. may have an interest in El Paso’s assets because those companies are seeking additional opportunities in shale fields, Brian Youngberg, an analyst at Edward Jones in St. Louis, said in an interview today.

“All those companies have significant shale interests already, but this would allow them to buy some shale properties that are already producing rather than having to buy leaseholds and develop them themselves,” he said.

Some of the largest energy companies may scale back spending on exploration and development in 2012 to free more money for acquisitions, Ted Harper, who helps manage about $6.8 billion for Frost Investment Advisors LLC in Houston, said in a telephone interview today.

The El Paso transaction would strengthen Kinder Morgan’s position as a major player in the U.S. gas industry, able to connect the new shale gas fields to markets across the country.

Total Deal Value

Once the deal closes, Kinder Morgan will further reduce its debt by selling pipelines to two subsidiary partnerships, which will issue their own debt and equity to pay for the assets, the company said.

The total value of the acquisition, including debt assumed from Houston-based El Paso, is $37.8 billion, Kinder Morgan said in a document prepared for investors. The takeover values El Paso at about 14 times the last 12 months’ earnings before interest, taxes, depreciation and amortization of $2.67 billion, according to Bloomberg data.

Kinder Morgan rose 4.8 percent to $28.19 at the close in New York. El Paso climbed 25 percent, the biggest gain in nine years, to $24.81.

--With assistance from Bradley Olson in Houston, Zachary Mider in New York, Joe Carroll in Chicago and Cristina Alesci in New York. Editors: Susan Warren, Charles Siler

Edward Klump in Houston at eklump@bloomberg.net

To contact the reporters on this story: Mike Lee in Dallas at mlee326@bloomberg.net;

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net


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