January 29, 2006

Enron Executives Spun Off What Has Become an $18 Billion Enterprise

FORT WORTH, Texas _ In the late 1990s, Enron Corp. became a high-flier by transforming itself into a new type of corporation, de-emphasizing its old-line natural gas businesses in favor of a trading company that made markets for energy and other commodities.

Chief Executive Jeffrey Skilling extolled the virtues of being "asset light" as the company unloaded so-called hard assets like energy production and pipelines. In August 1999, Enron sold its Enron Oil & Gas Co. subsidiary in a stock swap to Enron shareholders valued at $454 million.

The strategy seemed to make sense at the time, with natural gas selling for less than $2 per thousand cubic feet, crude oil under $18 a barrel and several big oil names, most notably Mobil Corp., seeking out mergers. But it would soon prove foolhardy. Enron quickly collapsed amid charges of smoke-and-mirrors accounting, market manipulation and corporate crimes.

And today, with the fraud trials of Skilling and Enron Chairman Ken Lay set to begin Monday, the businesses cast aside by Enron are on a roll.

In hindsight, the sale of EOG Resources was the best favor Enron could have done for its exploration company. As Enron headed into bankruptcy and criminal trials, EOG Resources has come to symbolize the revival of old-school energy exploration and drilling as one of the country's top independent producers.

Profitability was never an issue for EOG Resources, even through the energy industry's lean days of the late 1990s. In 1999, its first year as an independent company, EOG earned $140.8 million. But as energy, particularly natural gas, has boomed in the first decade of the new century, EOG has benefited handsomely. For the first nine months of 2005, the company earned $790 million. It will report its fourth quarter and full year results on Thursday.

EOG's market capitalization, listed at $1.6 billion in March 2000, exceeded $18 billion last year, almost a third of Enron's total value at its peak stock price.

"I'm sure that in hindsight, Enron would take that one back," Fort Worth oilman Jon Brumley said.

"EOG was always a good business," said Brumley, who headed Southland Royalty and what is now XTO Energy before founding Encore Acquisition Co. "So was Northern Natural Gas," Enron's original core business.

Kurt Wulff, an independent energy analyst in Falmouth, Mass., puts the matter succinctly.

"I know that the EOG people were glad to get away from Enron," he said. "EOG is a gas producer, and a good one. They didn't want to have anything to do with what Enron had become."

Enron's origins are linked to the natural gas business. Lay' Houston Natural Gas merged with the larger Northern Natural Gas Co., an Omaha, Neb.-based pipeline company, in 1986 and moved the combined company, now named Enron, to Houston. An economist by training, Lay had become an advocate of energy deregulation and led the drive to deregulate the interstate natural gas market. When the federal government opened those markets in the 1990s, Lay and Skilling recognized that a wholesale trading market would evolve for natural gas and they determined that Enron would be the center of it.

Accordingly, Lay and Enron's board picked Skilling, who came from the McKinsey & Co. consulting firm, over pipeline executive Richard Kinder to Enron's new president of Enron in 1996. Kinder promptly left Enron and began reorganizing the old K-N Pipeline company, later renamed Kinder Morgan. It now controls almost 40,000 miles of natural gas pipelines covering much of the western United States.

Like EOG, Kinder Morgan has seen spectacular growth. In 2005, the company earned $374 million in its first nine months and reported a market capitalization of $11.7 billion.

Enron hung on to the original Northern Natural Gas pipeline. But after Enron's bankruptcy in late 2001, it was forced to sell the pipeline to crosstown rival Dynegy Inc. for $1.5 billion. Omaha, which had lost a company to Houston, got a measure of revenge a year later when Dynegy ran into its own problems amid the general collapse of the energy trading market. It then had to sell the 16,000-mile pipeline system to Warren Buffett for $928 million.

But the exploration business has done even better.

In its half-decade of independence, EOG has concentrated on natural-gas production, following the pattern of the other new-generation producers such as XTO Energy and Quicksilver Resources of Fort Worth and Devon Energy and Chesapeake Energy of Oklahoma City.

The strategy has paid off for EOG as the price of natural gas has more than quadrupled from its 1999 levels. By 2004, EOG Resources trailed only Devon Energy, ConocoPhillips, XTO Energy and Exxon Mobil in Texas natural-gas production.

In 2003, EOG became one of the main engines of the expansion of the Barnett Shale natural-gas field in North Texas. EOG Chairman Mark Papa has told analysts that the company plans to spend up to $1 billion to develop 400,000 acres of leases it has taken in Johnson County and adjoining counties to the west.

As of late last year, EOG had nine drilling rigs working in Johnson County and one each in Parker and Erath counties. From January through November 2005, EOG produced 12.1 billion cubic feet of gas from the Barnett Shale field, most of it in Johnson County.

The company's operations and reputation are growing. EOG is Texas' fifth-largest natural-gas producer, cashing in handsomely in the drilling boom not only in the Barnett Shale but in other Texas fields such as the Carthage field in East Texas and in the prolific South Texas and Permian basins.

EOG is also a major player in the Anadarko Basin of Oklahoma as well as areas of Colorado and Louisiana. It also drills and produces in the Gulf of Mexico

EOG produced 173.8 billion cubic feet of natural gas in Texas in 2004, and in the first 11 months of 2005 its gas production exceeded that, at 184.6 billion cubic feet.

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(c) 2006, Fort Worth Star-Telegram.

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ARCHIVE PHOTOS on KRT Direct (from KRT Photo Service, 202-383-6099): Jeffrey Skilling, Ken Lay

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