Reliance Industries Ltd. and Apollo Global Management LLC are eying the oil and natural-gas exploration and production unit of El Paso Corp. (EP), according to media reports.
However, the decision to divest the exploration and production unit wholly or in part, rests solely on Kinder Morgan Inc. (KMI). In October 2011, Kinder Morgan inked a deal with El Paso to purchase all the outstanding shares of the latter. El Paso agreed to merge with Kinder Morgan hoping that the transaction will provide even greater synergy to its shareholders than its planned spin-off of the exploration and production business.
The unit would be divested by Kinder Morgan to trim the likely high debt level inherited with the takeover as well as raise funds for the acquisition of El Paso. Kinder Morgan agreed on a purchase consideration of $38 billion, which included a debt outstanding of $17 billion.
Building positions in the thriving U.S. Shale market seems the safest bet for the energy companies. Recently, France-based TOTAL S.A. (TOT) agreed to acquire a 25% share in Chesapeake Energy Corporation‘s (CHK) arm – Chesapeake Exploration, L.L.C., and its partner EnerVest Ltd.’s holdings in the liquids-rich area of the Utica Shale play. TOTAL has paid $700 million for the portion of the play, which spreads across 10 counties on the eastern side of the state of Ohio.
Also, Devon Energy Corporation (DVN) joined hands with a China based Sinopec’s Sinopec International Petroleum Exploration & Production Corporation (“SIPC”) for the development of its oil and gas holding. SIPC will get a 33.3% interest from Devon’s combined 1.2 million net acres in Tuscaloosa Marine Shale, Niobrara, Mississippi, Ohio Utica Shale and the Michigan Basin, by making an outright cash payment of $900 million and paying another $1.6 billion in phases.
Likewise, Reliance Industries, an Indian energy major would also be interested to have a share of the pie. With a cash balance of $11.6 billion as of September 30, 2011, investment in the U.S. shale will be a prudent way to utilize its cash. However, Reliance Industries has not yet decided on bidding for these assets.
Reliance Industries had already invested billions in exploration and production joint ventures with U.S. companies over the past two years. Materialization of the purchase would give ownership of business to Reliance Industries in the U.S. We even foresee Reliance to go ahead with the deal and expanding its existing base in the US.
Any company buying the exploration and production unit of El Paso will have access to 500,000 acres in the Eagle Ford Shale, Permian Basin and other fields in Texas, 46,000 acres in Louisiana’s Haynesville Shale and 605,000 acres in the Raton Basin coal-bed methane field in New Mexico and Colorado.
Based in Houston, Texas, El Paso Corporation is engaged in natural gas transmission and in the exploration and production sectors of the energy industry. The company primarily operates in the United States with some exposure in Brazil and Egypt. The quantitative Zacks #4 Rank (short-term Sell rating) for the company indicates downward pressure on the shares over the near term.
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