What The El Paso Split Means for Shareholders (EP, EPB, MRO, WMB)

El Paso Corp. (NYSE: EP) owns one of the country’s largest pipeline systems, extensive natural gas storage capacity, and some E&P assets. It also owns the general partner interest, 100% of the incentive distribution rights, and 48.9% of the limited partner interest in El Paso Pipeline Partners, L.P. (NYSE: EPB). The company’s market cap is around $14 billion and its P/E ratio for the trailing twelve months is 33.77, while its forward P/E ratio is about 15.

El Paso announced today that it plans to spin off its E&P business into a separate company, much like the recent spin offs at Marathon Oil Corp. (NYSE: MRO) and Williams Companies, Inc. (NYSE: WMB). The company didn’t provide much detail other than to say that the tax-free spinoff is expected to be completed by the end of 2011.

The E&P business generated $1.8 billion in 2010 revenue, about 39% of El Paso’s total sales of $4.6 billion. The new company will own about 3.7 million net acres in the Haynesville Shale play, the Eagle Ford Shale play, the Altamont play in Utah, and the Wolfcamp Shale play in the Permian Basin. Proved reserves of natural gas and oil total about 3.4 trillion cubic feet equivalent and in 2010 daily production averaged approximately 782 million cubic feet equivalent/day. That’s about 133,000 oil equivalent barrels/day.

That’s a pretty small E&P company, but one advantage the new company will have is that it is off the hook for a price-manipulation scheme in 2000-2001 that cost the company $1.7 billion in 2003. Seven cases are still being adjudicated and El Paso could be on the hook for another $140 million if it loses all of them. El Paso’s shares fell to a low of around $6.00 in early 2003, from a high of more than $70 in early 2001. The shares have recovered to a 52-week range of $10.17-$20.43, having set a new 52-week high today and within reach of share price not seen since mid-2002.

In its announcement, El Paso focused on what the spin-off means to holders of the remaining pieces of the company, noting that the planned dividend for 2012 is $0.60/share with a target dividend growth rate in the low double-digits. Shareholders in the spinoff company will be treated to more than 10 years of low-risk drilling inventory. Whoopee.

The so-far-nameless spinoff company should be more attractive to a potential buyer than the same assets were in a segment of the much-larger pipeline company. That’s got to be at least part of the reason for this move.

Paul Ausick