Energy executives look warily at assets

NEW YORK Thu Jun 7, 2007 10:34am EDT

Thomas Farrell, President of Dominion Resources Inc., speaks at the Reuters Energy Summit in New York, June 20, 2005. Energy industry executives are looking for deals across the power and oil and gas sectors, but with valuations and asset prices running at high levels, many have narrowed their deal criteria to exclude large link-ups. REUTERS/Chip East

Thomas Farrell, President of Dominion Resources Inc., speaks at the Reuters Energy Summit in New York, June 20, 2005. Energy industry executives are looking for deals across the power and oil and gas sectors, but with valuations and asset prices running at high levels, many have narrowed their deal criteria to exclude large link-ups.

Credit: Reuters/Chip East

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NEW YORK (Reuters) - Energy industry executives are looking for deals across the power and oil and gas sectors, but with valuations and asset prices running at high levels, many have narrowed their deal criteria to exclude large link-ups.

Dominion Resources (D.N), for instance, which has just finished selling most of its exploration and production business, is not planning on any large acquisitions for its remaining power generation business, according to Chief Executive Thomas Farrell.

Farrell said such a move would not create as much value for shareholders as Dominion can on its own. But the company would be interested in buying assets on the eastern side of the United States "if the right thing came along," Farrell said during the Reuters Global Energy Summit in New York earlier this week. <ID:nN05277039>

And he is also considering creating a master limited partnership for the company's Appalachian exploration and production assets, which Dominion has said it will hold onto because of the way the assets feed into its other operations.

Energy companies have already carved out billions of dollars of assets and put them into MLPs which are then floated on the stock market. Investors like MLPs for their tax-free structure and regular dividends.

While typically these MLPs have focused on pipeline assets because of their high cash flow that can feed the dividend requirements, now there are signs that E&P partnerships are picking up steam as well. More than one-half dozen of these vehicles are trading on the stock market. Earlier this week, XTO Energy Inc. XTO.N became the latest to add itself to the fray, saying it may put the $2.5 billion in E&P assets it bought from Dominion into an MLP.

As more and more E&P MLPs are created, that could create even more demand for these oil and gas assets and drive their prices up further, one banker said.

"The question is with the advent of an increasing number of exploration and production MLPs, will it lead to more acquisition activity in the pure upstream space, and I would say it is likely that that happens," said Andrew Safran, Citigroup's (C.N) global head of energy, power and chemicals.

Safran said that he expects few big deals involving a foreign buyer of U.S. assets in the next year in the oil and gas sector, where high commodity prices have made some executives wary that they might be buying at the top of the market.

THE POWER OF PRICE

High prices for power assets this year, among concerns about capacity shortages and a continued influx of private equity buyers, have kept demand strong but is also keeping some strategic, or corporate, buyers at bay.

And it has meant that power producer Dynegy Inc. (DYN.N) may be kicking a few tires but it is not jumping on anything, Chief Executive Bruce Williamson said this week. <ID:nN06396826>

Williamson said the company is planning to hold off on acquisitions unless something turns up at a good price and instead focus on a recent link-up with LS Power, which bought some Dynegy plants and took a 40 percent stake in the company earlier this year.

After it digests those changes -- sometime in the fourth quarter -- the company will start shopping around if prices have not risen too high, Williamson said.

Those high valuations have become such an issue that John Bryson, chief executive of Edison International, said on Wednesday the company is ready to build power plants fired by natural gas rather than buy if it needs to. <ID:nN05288976>

The value of those assets is helping at least one traditional power company, Calpine Corp. CPNLQ.PK. The company, which is in bankruptcy protection and slated to submit its reorganization plan on June 20, said higher valuations have changed people's sense of what Calpine is worth since it filed for bankruptcy in December of 2005.

"It gives the company a significant amount of flexibility it didn't have before," Chief Executive Robert May said earlier this week.

May said that Calpine, which had been approached by possible buyers for its assets, had been able to make them understand that the assets were valuable and allowed it to say no to some "bottom feeders."

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