Energen has two main businesses - (upstream) oil and gas exploration and production and gas utilities distribution. The company has petroleum reserves in New Mexico, Colorado, Alabama, Texas, and Louisiana, and sells its hydrocarbons to refiners and petroleum distributors; its only utilities subsidiary, Alagasco, is Alabama's largest gas distributor. About 70% of the company's revenues come from its E&P segment.
As an oil and gas company, Energen is exposed to the commodity nature of petroleum. Decreasing world production and increasing world demand have driven oil prices through the roof and caused natural gas prices to fluctuate erratically. Energen's margins have followed these trends; with oil over $100/barrel, the company's coffers are flush with cash, and total margins rose to 38% in the fourth quarter 2007.
The company's oil and gas business reduces its exposure to the downsides of its utilities business: state-regulated rates and returns and income that rises in the winter and goes negative in the summer. Current conditions in the oil and gas markets mean that Energen's margins are significantly higher than other gas utilities; despite the negative effects of rising gas costs on utilities' margins, regulation keeps the company's returns at a steady rate, while margins growth in the oil and gas business allows the company to increase its dividends every year. Since infrastructure for utilities companies are expensive, Alagasco doesn't have any real competition; in the petroleum sector, Energen competes with the oil majors, as well as smaller independent production companies like Devon Energy, EnCana, and Chesapeake Energy.
Energen is a holding company with two main businesses: upstream oil and gas operations and natural gas transport, marketing, and distribution services. The company's subsidiary, Alagasco, is the largest gas utility in Alabama. Energen has oil and gas operations in the San Juan Basin of New Mexico/Colorado, the Permian Basin of Texas/New Mexico, the Black Warrior Basin of Alabama, and the North Louisiana/East Texas oil fields that include the lucrative Barnett and Woodford Shales.
|Total Production (MMcfe)||98,605||95,595||91,099|
|Natural Gas (MMcf)||64,300||62,824||61,048|
|Proved Reserves (MMcfe)||1,753,652||1,722,811||1,721,537|
|Total Gas Delivery Volumes (MMcf)||82,706||84,296||86,949|
|Average Number of Customers||451,167||455,014||460,046|
In 2007, Energen saw operating revenues of $1.435 billion, and operating income of $309 million. The majority of the company's income was earned through its oil and gas operations; because of regulation, margins for utilities businesses are usually very low.
Energen has quietly increased its dividends every year for the past twenty six years; in January of 2008, the board increased the company's dividends by 4.3%. In the past, utilities paid high dividends because stringent government regulation kept them from having much growth potential. This made them very sensitive to short-term interest rates, as higher interest rates made government bonds more attractive as investments; more people investing in government bonds meant less people buying utilities stock, causing shares to fall. Now, however, the combination of deregulation and the diversification of gas utilities into energy trading, generation, and other businesses mean that the companies have greater growth potential and less exposure to interest rate effects. Now, though utilities still pay dividends, these are lower than in the past - because utilities companies now have a chance for strong share growth, so high dividends are no longer necessary to serve shareholder interests. Energen's dividend pays out 65-75% of Alagasco's net income, along with some of the upstream business's net income.
Just 27% of Energen's revenues come from its utilities business; it gets six times the operating income from its oil and gas business, making the company dependent on the success of the oil and gas market. Since both oil and natural gas are commodities, Energen's margins are subject to the volatility of each products' prices. Oil and gas prices have fluctuated heavily over the past few years, though the most recent trend is a rise in prices, with a barrel of oil trading in international market over $100. Because both are nonrenewable forms of energy (they will eventually run out), slowing discoveries of new sources combined with increasing pricing has led to speculation that production is approaching peak oil quantities. Whether this is true or not, oil and gas are commodities: one company's gas can only be differentiated from another company's gas based on price. While Energen's largest business currently benefits from high prices, the profitability of the current market will drive increased exploration and production, which could eventually cause prices to fall and margins to drop.
In 2007, Energen spent $379.5M on capital expenditures for its E&P segment; it spent less than a sixth of that on capital expenditures for its distribution segment. With oil and gas prices so high at the moment, margins are very healthy; furthermore, many analysts predict the price level to stay where it is, as the possibility of peak oil has reared its ugly head. With all its reserves onshore in North America, Energen has relatively little risk. Over the past three years, the company added 364 Bcfe of proved reserves, and in 2007 it added more than it produced. With an average reserve life of around 17 years, and an E&P segment strong enough to replace more wells than it uses, Energen is in a strong position to grow its E&P segment into a far larger and more profitable business than it already is.
Natural gas is used most commonly in home heating systems, making its demand partially dependent on the temperature outside. First- and fourth-quarter revenues for Energen tend to be higher than second- and third-quarter revenues because late fall through early spring are much colder than late spring through early fall. Energen's distribution segment (Alagasco) saw 2007 revenues of $298.6 million (1Q), $111.6 million (2Q), $67.6 million (3Q), and $131.7 million (4Q), effectively illustrating how cold temperatures lead to higher gas revenues. Alabama regulations require Alagasco to adjust its gas rates to reflect temperature-based gas usage; when it's colder, rates go down because people need heating, and vice versa, thus somewhat moderating the effect of weather on Alagasco's business. The sheer volume of gas usage in the winters in Alabama, however, causes revenue cyclicality nonetheless. This temperature dependence also means that unusual seasonality has a real effect on the company's operations; warmer winters, a predicted outcome of global climate change, will damage the company's revenues by decreasing demand at a key part of the year.
Incidentally, the gas utilities demand cycle is exactly opposite that of electric utilities, who see higher demand in warmer months because air conditioning units are electrically powered.
In a high-price market, Energen's exploration business makes more income, while its utilities business makes less (until regulators raise prices). One would assume that Energen would sell natural gas from its upstream segment to Alagasco, but this isn't the case; since regulators put a certain rate of return on the company, they are essentially limiting the margins the company can have. If Energen were to sell its gas at production cost to Alagasco, regulators would simply lower Alagasco's rates, to balance returns to customer expenditures. Therefore, it's more efficient for Energen to sell its oil and gas to energy marketing companies and balance its (utilities) gas purchases between long-term contracts and short-term (spot) contracts to keep costs within a certain range and not attract regulator attention. This allows the company to reap the high margins of $100+ oil and still maximize returns off of its utilities business.
Utilities tend to be highly regulated business in the U.S., with the national government setting transmissions rates and state governments setting electric and gas distribution rates. In Alabama, Alagasco can only make between 13.15% and 13.65% returns on its equity. These rules are designed to ensure both profitability for the company and accessibility for the consumer, but often hold back utilities companies, like Energen, from achieving potential revenues and profitability by preventing them from charging delivery rates that the level of demand would really allow. Regulation can also cause the company's margins to be very volatile, as lobbying the government is the only way the company can control its prices. Unfortunately, natural gas costs fluctuate very rapidly, but it takes a long time for Energen's lobbyists to convince state and regional regulators to raise the price ceiling. For the most part, regulators will only raise rates if the company can show that something, whether rising costs or inflationary pressure, is causing their margins to shrink to unfair levels.
Energen competes in the upstream oil and gas business with industry powerhouses like BP, Chevron, Exxon Mobil, ConocoPhillips, and Royal Dutch Shell - the oil majors. It also competes with a number of independent oil & gas companies like Chesapeake Energy, Devon Energy, and EnCana.
Alagasco is the largest gas distributor in Alabama. In the markets it serves, the company has little real competition thanks to the high cost of infrastructure installation; government regulation, however, keeps the company from charging the rates and turning the profits that would otherwise be expected of a monopolist that sells products with inelastic demand. On a larger scale, Energen competes with other gas utilities like:
|AGL Resources||Atmos Energy||Energen||Equitable Resources||National Fuel Gas Company||ONEOK||Sempra Energy||Southern Union Company||National Grid Transco|
|Total Revenue (Millions)||$2,494||$5,898||$1,435||$1,361||$2,039||$13,488||$11,438||$2,617||£8,778|
|Gas Delivered (Bcf)||319||297.3||82.7||49.5||38.98||176.55||N/A||56.2||N/A|
|Number of Utilities Customers (thousands)||2,271||3,187||451||274||725||2,050||N/A||552||11,571|