Will El Paso Exploration Rest in Pieces?

When Kinder Morgan (NYSE: KMI  ) announced its intent to purchase El Paso (NYSE: EP  ) in October, it made it very clear that it was not interested in the exploration and production side of the company. Now, as the deal moves closer to regulatory approval, Kinder Morgan is faced with the very thing that has haunted mankind since the beginning of time: options.

Breaking up is hard to do
Kinder Morgan can sell El Paso's E&P unit to one buyer, or it can sell it off piecemeal to several interested players. Obviously, it is far less complicated to dump the entire thing in one fell swoop. It would be lucrative, too -- collectively El Paso's assets are valued at around $7 billion.

It is impossible to know at this stage whether selling off the pieces of the business would generate more than that, a downside to selling the operation piece by piece. Another downside to breaking up the business is that the process would take much longer to complete. The company had initially anticipated selling the assets before the acquisition officially closes in the spring. This isn't a major hang-up on its own but may be a contributing factor if a piecemeal sell-off doesn't generate the right dollar figure.

Best part of breakin' up
Selling El Paso's E&P business in pieces likely increases the amount of players coming to the bargaining table. A company with expertise in deepwater drilling (I'm sure it's out there somewhere), for example, may only want the assets in Brazil. A company looking to increase its U.S. acreage may only want the domestic assets.

Plus, not every energy company has $7 billion to throw around right now, especially those American companies that have been dinged by the now comically low price of natural gas. But those same companies may be willing to pay a smaller percentage of that price for El Paso's assets in the natural-gas-liquids-rich Eagle Ford shale.

So happy together
Kinder Morgan and El Paso both had excellent finishes to 2011 -- El Paso's success was due much in part to the merger. The company is one of the top 10 stocks hedge funds love, returning 82.1% for the year, largely because of a price spike after the acquisition announcement.

Kinder Morgan, one of the Fool's top five energy stocks for 2012, reported higher cash on hand for 2011 than had been originally anticipated at its February IPO. The improved number allowed Kinder Morgan to pay out a higher dividend. KMI's results are driven by its general partner stake in Kinder Morgan Energy Partners (NYSE: KMP  ) , the MLP that owns virtually all of the Kinder Morgan assets. Though KMP "missed" "analyst estimates," revenues and net income were up over last year, and as fellow Fool David Lee Smith puts it, the future is brightly blazing at Kinder Morgan.

Stay up to date on Kinder Morgan's quest to divest El Paso's assets by adding the companies above to My Watchlist.

Fool contributor Aimee Duffy doesn't own shares of the companies mentioned in this article. If you have the energy, check out what she's keeping an eye on by following her on Twitter, where she goes by @TMFDuffy.

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  • Report this Comment On January 23, 2012, at 7:55 PM, Epressley wrote:

    Surely, you are not suggesting that I run out and pickup a stock that is trading at almost 800 times earnings. KMI is paying $26.80 for a company trading at $26.85 (Just so amateur investors don't get the wrong idea from the article).

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