Dominion to purchase Louis Dreyfus Natural Gas

Sep 11, 2001 02:00 AM

Dominion Resources, the Richmond-based energy holding company that owns Virginia's largest electricity supplier, said that it will buy an Oklahoma natural gas company for $ 2.3 bn, a transaction that would boost its gas reserves by 60 %. The purchase of Louis Dreyfus Natural Gas, for a combination of cash, stock and assumed debt, was described by Dominion officials as a long-term gamble that natural gas prices will climb because of the fuel's use to generate power.
In a conference call with financial analysts, Dominion's CEO, Thomas E. Capps, acknowledged that buying a huge chunk of natural gas reserves when prices are falling is at odds with conventional wisdom.
"The best opportunity to create real value is to buy when most others are selling," Capps said. "When the pundits and so-called experts say zig," he added, "that's the time to zag."

Dominion's Virginia Power electricity customers shouldn't be affected by the acquisition because retail electricity prices in the state are frozen for the next seven years in a transition to deregulated retail sales.
The deal is subject to approval by federal antitrust regulators and Louis Dreyfus shareholders. Dominion officials predicted the process would be completed by the end of this year.
Louis Dreyfus, based in Oklahoma City, is among a group of oil and gas companies whose gas reserves are likely to be coveted by larger energy companies, particularly after the decline in gas prices since last winter. Earlier this month, Tulsa-based Williams completed a $ 2.9 bn acquisition of Barrett Resources, a Denver natural gas producer.

Dominion, which had $ 5.4 bn in revenue in the first half of this year, has invested heavily in natural gas production, beginning with its $ 8.9 bn purchase of Pittsburgh-based Consolidated Natural Gas in 1999. Dominion said it also will use the Louis Dreyfus gas to underpin a major expansion of its energy-trading operations on commodity markets.
According to Dominion's forecast, the demand for natural gas as apower-plant fuel is likely to grow by 10 % a year over the next decade because gas-fired plants are significantly cleaner and cheaper to build than those burning coal or oil. Meanwhile, US gas producers will struggle to keep domestic supplies growing 2 % annually, Dominion predicted. That optimism was not shared by investors.
"Investors were not thrilled at this deal at first glance," said Curt Launer, an analyst at Credit Suisse First Boston in New York. "It will be up to management to show that this will work for the company." In paying about $ 40 per share for Louis Dreyfus, Dominion is buying Gulf Coast and mid-continent gas reserves for about $ 1.53 per thousand cf, Dominion said.

Dominion will spend an additional $ 1 per thousand cf to produce the gas and pay related interest and operating costs, it confirmed. So it must sell it for about $ 2.50 per thousand cf to break even. Prices are now below that level, and industry analysts are debating how high they will go over the next two years. Capps and other Dominion officials told analysts the company has already begun signing contracts for advance sales of the Louis Dreyfus gas for next year, locking in a price over $ 3.

Source: The Washington Post Company
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