Natural gas transmission, exploration and production company El Paso Corporation (NYSE:EP) announced the separation of the company into two independent public companies through a tax-free spinoff of its exploration and production segment. The company plans to complete this reorganization before the end of 2011.

TUTORIAL: Mergers and Acquisitions

Latest Trend
The energy sector has seen a number of restructurings over the last few years as management teams look to create shareholder value through spinoffs or initial public offerings of various businesses. (Different markets provide unique opportunities and risk for investors. Find out more in A Fresh Look At The Financial Markets.)

Williams (NYSE:WMB) announced a similar plan in February 2011, and plans to conduct an IPO of its exploration and production properties in the third quarter of 2011, followed by a spinoff of the balance of this business in 2012.

Why Separate?
El Paso cited a number of reasons to justify this restructuring, including sharper focus by management, more flexibility to make acquisitions with separate equity currencies and improved access to capital markets. The company also believes that the spinoff of the exploration and production businesses will improve El Paso's credit profile.

Parent Company
After the spinoff is completed, El Paso will consist of the Pipeline and Midstream Group and will also own the limited and general partnership stakes in El Paso Pipeline Partners, L.P. (NYSE:EPB).

El Paso's pipeline business is one of the largest in the United States, with ownership of 43,100 miles of natural gas pipeline as of year-end 2010, or 19% of the total interstate pipeline network in the United States. This segment put out about $1.2 billion in EBITDA in 2010 and crossed through 27 states. The company also has a backlog of $8 billion in pipeline projects under construction in the pipeline group.

Another large pipeline company is Enbridge (NYSE:ENB), which owns a network of pipelines carrying liquids and natural gas across North America. Enbridge yields around 6.7% and is down 8% over the last month.

Midstream Business
El Paso also has an extensive collection of midstream assets that will remain with the parent company. These include infrastructure that processes the oil and gas and then transports it from the well head to the pipeline. The company believes that this business will be a growth area going forward, because more than $30 billion worth of this infrastructure is said to be needed in the United States by 2020. (Learn how to analyze earnings sustainability, an important part of making sound investments; read Earnings Sustainability: The Key To Your Investing Future.)

El Paso plans to pay a 60 cent annual dividend after the reorganization is complete, and is targeting a low double-digit growth rate of this dividend going forward.

The new upstream company will be a fairly large standalone exploration and production company, with proven reserves of 3.4 Tcfe at the end of 2010. Production in 2010 averaged 782 million cubic feet of natural gas equivalents per day, and exited 2010 at a rate of 800 million cubic feet of natural gas equivalents per day.

This upstream company is involved in various core plays, and like many of its peers, is looking to increase oil and liquids production. The current focus is one the Eagle Ford Shale Wolfcamp play in the Permian Basin and the Altamont area in the Uinta Basin.

The Bottom Line
El Paso has decided to break in two and will separate its upstream business through a tax-free spinoff to shareholders before the end of 2011. This decision follows the general industry trend over the least few years.

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