Oil, Gas Reserves Valued at $15 Billion
By Steven Mufson
Washington Post Staff Writer
Thursday, November 2, 2006
Dominion Resources Inc., the nation's second largest utility owner, said yesterday that it would put most of its oil and natural gas production assets up for sale, and industry analysts said they could fetch more than $15 billion.
The sale would include about 5.5 trillion cubic feet of proven natural gas reserves as well as extensive prospects in the Gulf of Mexico -- an unusually large amount of U.S. oil and gas reserves to be put up for sale in one chunk. Richmond-based Dominion said it would keep its older Appalachian gas holdings, 17 percent of its proven reserves and 8 percent of its production, and its large natural-gas storage system.
The restructuring would leave behind a firm more focused on its electric utility in Virginia, a natural gas distribution company in Ohio and electric power plants in New England, Wisconsin and other parts of the country. Dominion executives said they hoped that the divestiture would boost the stock price for shareholders who are seeking a less volatile, more stable business and source of dividends.
"The percentage of our earnings derived from our E&P [exploration and production] business exceeds the comfort level of those investing in the utility sector," Thomas F. Farrell II, Dominion's chief executive, said in a conference call yesterday. "Our E&P management team has created a great deal of value for our shareholders, but we do not believe that it will ever be fully recognized in Dominion's stock price."
Yesterday Dominion shares bucked the market's downward move and closed at $83.61, up $2.62, or 3.2 percent.
Farrell said that the earnings of the remaining company, from its regulated Virginia utility and unregulated merchant power business, would probably grow at a 4 to 6 percent pace.
The volatility of the natural gas production business was illustrated in the company's earnings, announced yesterday. Dominion said third-quarter profit jumped to $654 million ($1.85 a share), from $15 million (4 cents) in the comparable period a year earlier. Last year's results were hurt by hurricanes that battered the Gulf of Mexico oil and gas wells that Dominion is planning to sell.
Dominion has long owned natural gas production in the Appalachian region but it expanded its oil and gas exploration and production holdings between 1999 and 2001 by purchasing Consolidated Natural Gas Co., Remington Energy Ltd. and Louis Dreyfus Natural Gas Corp. In addition to acquiring natural gas assets when energy prices were low, Dominion's purchases provided a hedge against costs its utility subsidiary might face if energy prices soared, as they did.
New legislation in Virginia makes it easier for Dominion to pass higher fuel costs onto homeowners and businesses. Moreover, with natural gas prices sharply higher, it is a good time to sell oil and gas assets. Industry sources note that mergers and acquisitions in the past couple of years have priced proven natural gas reserves at $2.50 to $3.75 per thousand cubic feet. At a $3 rate, the Dominion reserves would be worth $16.5 billion.
Dominion said it would use the cash to buy back shares, invest in power generation and transmission, and trim its $14.4 billion in long-term debt, which is rated triple-B-plus.
That was applauded by bond analysts at Fitch Ratings Ltd. In a statement affirming Dominion's ratings, Fitch's analysts said they had "in the past expressed concern that E&P operations entail relatively greater business and commodity price risks than most of Dominion's other activities."
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