The merger of Kinder Morgan (NYSE:KMI) and El Paso Corporation (NYSE:EP) will not only create the largest pipeline company in the United States, but will also put a large exploration and production operation into play, as management does not see a place for these assets in the post-merger company.
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.
El Paso reported proved reserves of 3.36 Tcf at the end of 2010, with approximately 61% of these oil and gas reserves in the developed category. These assets are located mostly in the United States, although the company does have 3% of its proved reserves in Brazil. This level of proved reserves ranks El Paso slightly under Newfield Exploration Company (NYSE:NFX), which reported proved reserves of 3.7 Tcfe at the end of 2010.
El Paso also has 1.1 million undeveloped acres in Egypt, with no current production or reserves. One area that the company has an interest in, is the South Alamein Concession in the Western desert of Egypt. The company has a 50% interest in this concession, along with TransGlobe Energy Corp (Nasdaq:TGA). One logical buyer for the assets in Egypt might be Apache Corp (NYSE:APA), which already has a large presence in that country.
El Paso reported average production of 823 million cubic feet equivalent per day, in the second quarter of 2011. This includes 61 million cubic feet equivalent per day from Four Star Oil & Gas Company, an unconsolidated affiliate that El Paso accounts for as an equity investment. This represented 4% growth over the same quarter in 2010.
Although El Paso has increased the development of oil and liquid hydrocarbon plays over the last few years, the company's production is still overwhelmingly composed of natural gas, with 86% of production from natural gas in the most recent quarter. This percentage excludes production from the Four Star Oil & Gas Company.
The Exploration and Production segment generated $250 million of EBIT in the second quarter of 2011, but this figure was inflated by $101 million, due to the mark-to-market impact of the company's derivative position.
El Paso has a large operation in the Haynesville Shale, where the company has ramped up production from almost nothing at the beginning of 2009, to 265 million cubic feet equivalent per day, in May 2011.
El Paso is also involved in the Eagle Ford Shale and the Permian Basin, two areas that might attract interest from others in the industry. In the Permian Basin, El Paso has 138,000 net acres exposed to the Wolfcamp Shale, a horizontal oil play that many other operators are also pursuing.
In South Texas, El Paso is working on the Eagle Ford Shale and has three rigs operating there. The company has drilled 52 wells and expects strong growth in production, in the second half of 2011.
What's it Worth?
Kinder Morgan wouldn't put a value on the exploration and production assets during the merger conference call, but analysts have pegged the value in a range from $7.3 billion to $9 billion, according to Bloomberg.
One large integrated oil company that has a small presence in the onshore United States is BP (NYSE:BP). The company sold its position in the Permian Basin to Apache Corp, back in August 2010, when the company was looking to divest assets to handle liability from the Gulf of Mexico oil spill. BP has since built up a small position in the Eagle Ford Shale.
The Bottom Line
El Paso has an attractive set of exploration and production assets, despite a marked orientation towards natural gas in its proved reserves and production base. The marketing of these assets may create intense interest from larger players looking to get into domestic plays. (For additional reading, see What Determines Oil Prices?)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
Stock AnalysisUnderstand why energy companies' stock are volatile when oil prices are volatile. Learn about the top five energy companies to buy and hold.
InvestingCommodity prices have been heading lower for more than four years, being the worst performing asset class of 2015 with more losses in cyclical commodities.
Stock AnalysisHere are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
InvestingThe further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
InvestingWest Texas Intermediate oil futures have recently made pronounced movements. What do they bode for the world market?
InvestingGrowing global demand for quinoa has impacted Bolivian farmers' way of life. Should the American consumer be wary of buying this product?
MarketsDepressed crude oil prices are here to stay for the foreseeable future. Here's how it will affect an oil industry riddled with unsustainable debt.
Fundamental AnalysisOptions market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
Stock AnalysisCan these two oil stocks buck the trend?
Investing NewsAlcoa plans to split into two companies. Is this a bullish catalyst for investors?
Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>