Apollo Group Said to Be Near Deal to Buy El Paso Oil Unit for $7 Billion

Apollo Global Management LLC (APO) is leading a group that’s near a deal to acquire El Paso Corp. (EP)’s oil-exploration business for about $7 billion, according to a person with knowledge of the situation.

An agreement may be announced as soon as today, said the person, who declined to be named as talks are private. The negotiations are fluid and may still fall apart, this person said. Apollo is working with Riverstone Holdings LLC and Len Blavatnik’s Access Industries Holdings Inc., people said.

The deal under discussion would be on par with KKR & Co.’s $7.2 billion takeover of Samson Investment Co. last year, the largest corporate leveraged buyout since 2007. El Paso’s assets are attractive because of its acreage in the Niobrara field in Colorado and the Eagle Ford and Wolfcamp fields in Texas, which produce more profitable oil and natural-gas liquids such as propane and butane, said Raymond James & Associates’ Darren Horowitz.

“All of those areas are, I think, the right place at the right time,” said the Houston-based analyst, who rates Kinder Morgan an “outperform” and owns none of its stock. “What any potential bidder is going to be looking at is the net asset value of that acreage and the associated production over time.”

Kinder Deal

Kinder Morgan Inc. agreed to buy El Paso for $21.1 billion in October and planned to sell the oil and natural gas exploration and production unit to help finance the takeover. Larry Pierce, a spokesman for Houston-based Kinder Morgan, declined to comment, saying the company doesn’t discuss any potential mergers, sales or acquisitions. Charles Zehren, a spokesman for Apollo, and Jeffrey Taufield, a spokesman for Riverstone, declined to comment.

Apollo is planning $5.5 billion of debt financing for the purchase, said three people with knowledge of the transaction. The financing is expected to include $3.5 billion of bonds and a $2 billion loan, said the people, who declined to be identified because no agreement has been signed. About half the loan will be used to fund the buyout, the people said.

The Wall Street Journal reported the talks yesterday.

Apollo agreed in December to sell Parallel Petroleum Corp., an oil and gas producer based in Midland, Texas, to a group of South Korean companies for $771.5 million. The buyout firm acquired Parallel in 2009 for $483 million.

‘Perfectly Reasonable’

“It’s perfectly reasonable for them to be looking for another energy investment” after selling Parallel, Dan Morrison, an analyst at Global Hunter Securities LLC in Fort Worth, Texas, said by telephone.

U.S. oil and gas transactions involving private-equity firms more than doubled in value last year to about $14 billion, according to data compiled by Bloomberg. The takeover of Samson Investment, completed in December, was also the biggest leveraged buyout of an oil and gas producer.

Crude prices are up about 12 percent in the past year and traded at $108.56 barrel in electronic trading on the New York Mercantile Exchange at 12:03 p.m. Singapore time. Natural-gas prices have dropped 81 percent from their 2008 high, as new drilling techniques have unlocked vast reserves from formations of shale rock.

‘Damaged Brand’

El Paso gets 96 percent of its production from its U.S. oil and gas fields, including large positions in the Haynesville Shale in Texas and Louisiana and in the Rocky Mountains. The company also has acreage in Brazil and Egypt.

The company was a “damaged brand” in 2003, El Paso Chief Executive Officer Douglas Foshee said during an analyst meeting in May last year, citing company scandals related to alleged market manipulation in its energy trading business and restated earnings to correct inflated numbers for its oil and gas reserves. The explorer sold assets to pay down debt and began shifting its focus from energy trading to its pipeline and production businesses, including acquiring acreage in unconventional shale fields, Foshee said.

El Paso announced May 24 it would spin off the exploration and production unit to its shareholders to concentrate the company on the pipeline business and lower its capital spending requirements. Five months later, after agreeing to buy El Paso, Kinder Morgan executives said they would sell the exploration unit rather than continue with the spinoff.

To contact the reporter on this story: 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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