Another Monday, another energy merger.
, a Virginia electric utility and energy concern, agreed to acquire
Louis Dreyfus Natural Gas
, an Oklahoma natural gas exploration and production company, for $1.8 billion in cash and stock plus the assumption of nearly $500 million in debt.
Dominion's $40.20 offer represents a 22% premium over the Friday closing price for Louis Dreyfus. "It's a very good offer for Dreyfus shareholders," says Simmons & Co. analyst Mark Meyer. Early this year, Meyer suggested Louis Dreyfus was a likely merger target. (Simmons hasn't done underwriting for either firm.)
Dominion -- which Meyer describes as a "nontraditional acquirer" -- is hoping Dreyfus will help fuel the company's continued growth as an integrated energy company. Dominion expects the acquisition to help double its energy trading volumes, with natural gas trading increasing from 1.2 trillion to 2.4 trillion cubic feet and electricity trading increasing from 136 million to 265 million megawatt-hours annually.
"The goal in acquiring Louis Dreyfus Natural Gas is to enhance our portfolio of fully integrated energy businesses, not to become a bigger E&P
exploration and production company," said Dominion President and Chief Executive officer Thomas Capps in a statement announcing the deal.
Big Price, Big Profits?
While the acquisition increases Dominion's proven natural gas reserves by 60% and annual production by more than 40%, it came at a big price.
"It's about $1.27 per thousand cubic feet of proved reserves," Meyer notes. "That is slightly above the price paid by
. And, the Dreyfus assets are a notch below that."
Dreyfus has experienced unexpected challenges recently with its south Texas natural gas program. "The rate of depletion has been a bit of a surprise for them," Meyer says. "This is a pretty good exit for them."
That doesn't necessarily mean Dominion is on the short end of the deal. Dominion says the acquisition will be "at least 5 cents accretive to current 2002 earnings-per-share expectations and more accretive in the following years." Dominion reaffirmed guidance for 2001 of $4.15 or better, and guidance of $4.85 to $4.90 per share in 2002 without the Dreyfus acquisition. It expects to close the deal in the fourth quarter of this year.
Meyer says companies with integrated marketing platforms like Dominion may pay a premium because they can optimize commodity values through more sophisticated trading, hedging and risk management strategies.
"The trading and marketing element that has entered the E&P acquisition game is less price-sensitive for what they are willing to pay for in-the-ground assets," Meyer says. "And, investors appear less sensitive to overpaying."
He says that bodes well for exploration and production companies at current prices. "That is something that argues for support under other stocks as well."
While it may bode well for E&P companies, it isn't clear nontraditional acquirers like Dominion grasp the nuances of the E&P business to make realistic assessments of their potential for an integrated energy company. If anything, Dominion's expectations from the Dreyfus purchase seem aggressive.
While it's always dangerous to call a trend, the troika of acquisitions in the past month suggests there could be more. With both traditional exploration and production companies looking to boost reserves, as well as nontraditional energy convergence companies like
and now Dominion looking to own natural gas reserves, a continued focus on gas-rich E&P names seems appropriate.
"Most of the nontraditional acquirers are after assets in a concentrated area with a natural gas bias," Meyer says.
Keep an eye north of the border for more acquisition movement. With Devon's bid for Anderson last week, speculation about the next Canadian play followed. We examined those possibilities late last week.
Other plays are likely in our own backyard.
"There is a list of probably 10, 15 or 20 names that are mentioned as possible takeovers," said Bryan Dutt, portfolio manager at Ironman Energy Capital, during last month's
TSC Energy Roundtable. "Companies like
which Dutt is long.
is a large name that is often mentioned;
is a hot name of late."
Dutt's comments are worth repeating as he ended his list with, you got it, Louis Dreyfus.
If the trend continues, check back for another column like this one next Monday.
Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, Edmonds was long Calpine, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to