El Paso’s ‘Juicy’ U.S. Shale Gas Assets May Attract Reliance, Occidental

India’s Reliance Industries Ltd. (RIL), Norway’s Statoil ASA (STL) and Occidental Petroleum Corp. (OXY) may be among bidders for El Paso Corp. (EP)’s oil and natural-gas unit as the companies seek to expand their stakes in U.S. shale fields.

Kinder Morgan Inc. is seeking a buyer for El Paso’s exploration business to help pay off debt from this week’s $21.1 billion takeover of the rival pipeline company, which creates the biggest gas pipeline network in the U.S.

The assets for sale, which include more than half a million acres of shale fields, may command a $7.3 billion price tag, according to data compiled by Bloomberg. Deep-pocketed bidders from outside the U.S. are among the likely bidders, Dan Morrison, senior energy specialist at Global Hunter Securities LLC in Fort Worth, Texas, said in an interview yesterday.

“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.”

Reliance, which reported cash of 614.9 billion rupees ($12.6 billion) this month, formed a joint venture with Atlas Energy Inc. and bid this year to buy the company before it was sold to Chevron. Statoil has formed joint ventures with Chesapeake Energy Corp. (CHK) to develop natural gas fields in Pennsylvania, and yesterday agreed to pay $4.4 billion in cash for Austin, Texas-based Brigham Exploration Co. (BEXP)

Reliance, Cnooc

Making a large energy purchase may be the best use of Mumbai-based Reliance’s cash, according to Kamlesh Kotak, vice president of research at Asian Markets Securities Pvt. in Mumbai. “As a policy we don’t comment on speculation,” Manoj Warrier, a spokesman for Reliance, said by telephone from Mumbai today.

A spokesman for Statoil didn’t immediately respond to a telephone call and an e-mail seeking comment.

Among Chinese companies, state-controlled Cnooc Ltd. would be the most likely bidder because it already holds stakes in Texas shale-gas assets, Neil Beveridge, a Hong Kong-based senior analyst at Sanford C. Bernstein & Co., said by telephone today. The El Paso assets “are reasonably priced” and “well within” Cnooc’s financing capabilities, he said.

Jiang Yongzhi, Cnooc’s Beijing-based spokesman, didn’t answer three calls to his office and mobile phones.

Sanford C. Bernstein and Goldman Sachs Group Inc. have predicted a surge of oil and gas takeovers after global energy shares fell 21 percent in the third quarter, the worst three months since 2008. Crude in New York has declined 5.3 percent this year amid concern that Europe’s debt crisis and a U.S. economic slowdown will drag the world back into recession.

Evercore, Barclays

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

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.

Shale Assets

El Paso owned drilling rights to 46,000 acres in Louisiana’s Haynesville Shale at the end of 2010, according to a regulatory 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.

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

Kinder Morgan’s stand-alone debt will increase to $14.5 billion from $3.2 billion after the acquisition, according to a Oct. 16 report from CreditSights Inc. Fitch Ratings Ltd. put Kinder Morgan Kansas Inc., which holds Kinder Morgan’s debt, on a negative ratings watch yesterday, saying the company was depending on the sale of the exploration unit to lower its leverage ratio.

Apache, Hess

Apache Corp. (APA), Hess Corp. (HES) and Los Angeles-based Occidental Petroleum 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 yesterday. Occidental is the biggest oil producer in Texas.

“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,” Jones said.

Apache doesn’t comment on merger and acquisition activity, said Bill Mintz, a spokesman for the Houston-based company. Hess didn’t respond immediately to a phone call and e-mail seeking comment. Melissa Schoeb, a spokeswoman for Occidental, didn’t immediately respond to a call seeking comment.

El Paso’s production unit had 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.

Market Valuation

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.

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.

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

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

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