Reliance Industries Ltd. (RIL) and Apollo Global Management LLC are among companies in talks to buy El Paso Corp. (EP)’s oil and natural-gas exploration and production unit, said people with knowledge of the matter.
Kinder Morgan Inc. (KMI), which agreed to acquire all of El Paso later this year, may decide this month whether to sell the entire unit or separate pieces, said the people, who spoke on condition of anonymity. Analysts at BNP Paribas SA estimated in November the business’s value at about $8.1 billion.
Kinder Morgan Chief Executive Officer Richard Kinder is seeking to raise cash from a sale of the production unit to help finance the $21 billion purchase of El Paso. The October deal would create the largest U.S. gas pipeline network. He wants to find a buyer for the unit by the time he’s ready to close the larger transaction, scheduled for the second quarter of this year, he said on a conference call in October.
Buying the El Paso division would give Reliance, India’s largest company by market value, a U.S. operating business after committing billions in the past two years to exploration and production joint ventures with U.S. companies. The Mumbai-based company hasn’t decided yet whether to bid for the unit, one person with knowledge of the matter said.
Private-equity firms and global energy companies are eager to buy their way into the U.S. shale boom, said Dan Morrison, a Fort Worth, Texas-based senior analyst at Global Hunter Securities LLC.
“There’s a lot of value in the operating organization at El Paso,” Morrison said in a telephone interview today.
Doubling Gas Reserves
New techniques that involve a combination of hydraulic fracturing and horizontal drilling have unlocked vast reserves in shale rock that have the potential to more than double the world’s gas reserves, according to the U.S. Energy Information Administration. In the past decade, the U.S.’s gas output jumped 11 percent.
Charles Zehren, a spokesman for Apollo, and Larry Pierce, a spokesman for Kinder Morgan, declined to comment. Tushar Pania, a spokesman for Reliance Industries, said the company doesn’t comment on speculation.
Private-equity firms such as Apollo have been hunting for deals in the oil and gas industry. KKR & Co. (KKR) agreed to the biggest-ever buyout of an oil and gas producer in November, with a $7.2 billion deal for Samson Investment Co.
Reliance, which had 614.9 billion rupees ($11.6 billion) of cash as of Sept. 30, has been looking for U.S. operating ability since its failed $1.7 billion joint venture with Atlas Energy Inc., Morrison said.
“Reliance is looking into the future,” said Deven Choksey, managing director at Mumbai-based brokerage K.R. Choksey Shares & Securities Pvt. “U.S. shale-gas assets may be the best place where it can deploy its large cash pile.”
Similar deals have been struck by European and Asian energy producers seeking to tap the expertise of smaller U.S. companies. China Petrochemical Corp., that nation’s second- largest producer, and Total SA, Europe’s third-largest oil company, committed about $5 billion to U.S. and Canadian shale rock formations yesterday.
At stake is El Paso’s 4 trillion cubic feet of oil and gas reserves, which includes more than 500,000 acres in fields such as Texas’s Eagle Ford Shale and Permian Basin.
Falling Gas Prices
Gas accounted for about 82 percent of the company’s production (EP) in 2010, assets that fetch far less today because prices have fallen precipitously, Carl Kirst, an analyst with Bank of Montreal in Houston, said in a telephone interview today.
“Whether Kinder proceeds with one sale versus breaking it up into parcels is largely going to depend on how much value they’re getting for their natural gas reserves,” said Kirst, who rates El Paso “outperform” and doesn’t own shares.
Gas futures prices in New York have fallen to less than a third of their July 2008 record of $13.577 per million British thermal units. In 2011, they averaged $4.026, according to data compiled by Bloomberg.
El Paso, which gets most of its revenue from pipelines, had been planning to spin off the exploration and production unit to shareholders before Kinder Morgan’s takeover offer.
The exploration business accounted for about one-third of El Paso’s $1.4 billion in sales in the latest quarter. In 2010, El Paso produced more than 95 percent of its output from U.S. oil and gas fields, including large positions in the Haynesville Shale in Texas and Louisiana and in the Rocky Mountains.
Kinder Morgan closed unchanged at $32.49 in New York.
To contact the reporters on this story: Zachary R. Mider in New York at firstname.lastname@example.org; Cristina Alesci in New York at email@example.com; George Smith Alexander in Mumbai at firstname.lastname@example.org