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Kinder Morgan Said to Prepare to Sell Parts of El Paso Unit

Kinder Morgan Inc. (KMI) is preparing to start talks on selling off parts of El Paso Corp. (EP)’s oil and gas exploration and production unit in case the pipeline operator can’t find a buyer for the whole division, said people with knowledge of the matter.

Kinder Morgan, which agreed in October to take over El Paso, plans to initiate formal negotiations with suitors for parts of the unit as soon as next week, said the people yesterday, who spoke on condition of anonymity as discussions are private.

Kinder Morgan is in separate talks with Apollo Global Management LLC and Reliance Industries Ltd. over a sale of the whole unit, and is asking for bids by Jan. 16, they said.

Selling off the business piecemeal may complicate Kinder Morgan’s effort to raise cash quickly to help finance its $21 billion takeover of Houston-based El Paso.

Some assets, such as acreage in Texas’s Eagle Ford shale prospect, are likely to attract many buyers, while others may be difficult to sell quickly, the people said. The whole unit may be worth $8.1 billion, analysts at BNP Paribas SA estimated in November.

Larry Pierce, a spokesman for Kinder Morgan, declined to comment yesterday. Gretchen Krueger, a representative for El Paso, referred questions to Kinder Morgan. Tushar Pania, a spokesman for Mumbai-based Reliance, declined to comment. Carolyn Sargent, a spokeswoman for New York-based Apollo, also declined to comment.

Breaking up the exploration unit is “a little surprising,” said Dan Morrison, a senior analyst at Global Hunter Securities LLC in Fort Worth, Texas.

Horizontal Drilling

El Paso has developed expertise in shale fields, which require a combination of horizontal drilling and hydraulic fracturing to produce oil and gas.

“There’s a lot of value in the operational organization to someone who really needs it -- like a foreign buyer or private equity,” Morrison said in an interview yesterday.

El Paso’s most attractive assets are its acreage in the Eagle Ford and Wolfcamp shale fields in Texas. The Eagle Ford has seen transactions from existing owners who want to increase their acreage, and from newcomers trying to buy into the field, Morrison said.

There have been few purchases in the Wolfcamp, Morrison said. Most production there has come from companies that leased land in the field and explored it themselves, he said.

El Paso had the estimated equivalent of about 4 trillion cubic feet of reserves at the end of 2011, including acreage in fields such as the Eagle Ford, according to a Dec. 19 statement.

Onshore Fields

Exploration companies have flocked to onshore oil fields to bolster their profit as oil prices rose and gas prices fell.

El Paso has drilled 57 wells in the Eagle Ford, according to its most recent quarterly report. Its oil and gas liquids production from the Eagle Ford jumped to about 10,000 barrels a day from 7,000 between September 30 and early November as it overcame a pipeline bottleneck, the report said.

El Paso’s production is expected to increase to the equivalent of 830 million to 840 million cubic feet of gas a day for 2011, from 782 in 2010, according to the Dec. 19 statement. About 86 percent of the company’s production was from natural gas, the rest was from crude oil and liquids, according to its third-quarter report. It also has acreage in Brazil and Egypt, although about 96 percent of its production is from the U.S.

Combining Kinder Morgan with El Paso would create the largest U.S. operator of oil and gas pipelines. El Paso dropped a previously disclosed plan to spin off the upstream business to shareholders. The unit had $1.1 billion of earnings before interest, taxes, depreciation and amortization in 2010, El Paso said in October.

Apollo has been working with potential co-investors including New York-based Riverstone Holdings LLC, one of the people said. Jeffrey Taufield, a Riverstone spokesman, declined to comment.

To contact the reporters on this story: Zachary R. Mider in New York at zmider1@bloomberg.net; Cristina Alesci in New York at calesci2@bloomberg.net

To contact the editor responsible for this story: Jennifer Sondag at jsondag@bloomberg.net.

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