QUOTE AND NEWS
SeekingAlpha  Apr 9  Comment 
By Jennifer Warren: Recently, Energen agreed to sell its Alabama gas utility for $1.28 billion to become a pure-play oil and gas firm. This development will help Energen Corp. (EGN) accelerate its 3P reserves (proved, probable, and possible) plus...
OilVoice  Apr 8  Comment 
Energen Corporation NYSE EGN today announced that it has signed a definitive stock purchase agreement to sell its natural gas utility business Alabama Gas Corporation Alagasco to The Laclede Gr
DailyFinance  Apr 7  Comment 
Energen Corporation (NYSE: EGN) today announced that it has signed a definitive stock purchase agreement to sell its natural gas utility business, Alabama Gas Corporation (Alagasco), to The Laclede Group, Inc. (NYSE: LG). The...
DailyFinance  Apr 1  Comment 
David Bolton has been elected by the Energen Corporation (NYSE: EGN) Board of Directors as Vice President – Land for the company’s oil and gas exploration and production unit, Energen Resources Corporation. The company is...
The Hindu Business Line  Mar 14  Comment 
Promoters fail to secure legal right for Railways to lay the line
SeekingAlpha  Feb 14  Comment 
By Jennifer Warren: Executive Summary: Energen will focus more in the oil-rich Midland Basin in 2014. While their stock price rose nearly 58% in 2013 by early December, there is a measured, hearty pace to their growth...
SeekingAlpha  Feb 12  Comment 
Energen Corporation (EGN) Q4 2013 Earnings Call February 12, 2014 11:00 AM ET Executives Julie Ryland – VP, IR James McManus – Chairman and Chief Executive Officer Chuck Porter – VP, CFO and Treasurer John Richardson –...
Reuters  Jan 28  Comment 
Oil and gas company Energen Corp has launched a sale process for its Alabama natural gas utility Alagasco, according to a source familiar with the matter.
Wall Street Journal  Jan 28  Comment 
Energen may sell its Alabama natural-gas utility as it looks to refocus its operations on its core oil-and-gas-extraction business, according to people familiar with the matter.




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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.

Business and Financials

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.

Energen Operating Data
2007 2006 2005
Total Production (MMcfe) 98,605 95,595 91,099
Natural Gas (MMcf) 64,300 62,824 61,048
Oil (MBbls) 3,879 3,645 3,316
NGLs (MMGal) 77.2 76.3 70.5
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 Increased its Dividends for Twenty-Six Years

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%.[1] 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.[2][3] Energen's dividend pays out 65-75% of Alagasco's net income, along with some of the upstream business's net income.

Trends and Forces

For Energen, Oil and Gas Prices Determine Profitability

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.

Energen is Focused on Expanding its E&P Segment

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.

Energen's Oil and Gas Operations Reduce its Exposure to Seasonal Utilities Revenues

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)[4], 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.

Energen's Upstream Business Hedges Against Margins Regulation

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.

Alabama's Regulation of Gas Distribution Gives Energen Little Control over its Margins

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.

Competition

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 - AGL Resources operates gas delivery services in Florida, Georgia, Maryland, New Jersey, Tennessee, and Virginia, and has close relationships with twelve different gas marketing companies.
  • Atmos Energy - Atmos operates in Texas, Kentucky, Louisiana, Mississippi, Colorado, Kansas, Tennessee, Georgia, Illinois, Iowa, Missouri, and Virginia. It is not only a gas utility but also a natural gas marketing, pipeline, and storage company.
  • Equitable Resources - Equitable Resources is a vertically integrated natural gas company that operates from the upstream to natural gas distribution. Its gas utilities operate in Pennsylvania, West Virginia, and Kentucky.
  • National Fuel Gas Company - NFG is a diversified natural gas company that does exploration, production, transportation, marketing, and distribution of gas; its utilities segment operates in New York and Pennsylvania.
  • ONEOK - ONEOK is a transport and distribution company that acts as a utility in Oklahoma, Kansas, and Texas.
  • Sempra Energy - Sempra is a gas and electric utilities company in California.
  • Southern Union Company - Southern Union is engaged in the storage, transport, production, and refining of natural gas; its utilities business operates in Missouri and Massachusetts.
  • National Grid Transco - National Grid is a gas and utilities company that operates in the United Kingdom and the United State; in the U.S., it operates in Rhode Island and New York.
Gas Utilities 2007 Metrics
AGL Resources[5] Atmos Energy[6] Energen[7] Equitable Resources[8] National Fuel Gas Company[9] ONEOK[10] Sempra Energy Southern Union Company[11] National Grid Transco
Total Revenue (Millions) $2,494 $5,898 $1,435 $1,361 $2,039 $13,488 $11,438[12] $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[13] 725[14] 2,050 N/A 552 11,571[15]




References

  1. Street Insider: "Energen Board Increases Cash Dividend 4.3%"
  2. Business Week: "Utility Stocks With Plenty of Spark"
  3. USA Today: "Utilities funds turn into power players"
  4. EGN 2007 10-K, Page 78
  5. ATG 2007 10-K
  6. ATO 2007 10-K
  7. EGN 2007 1-K
  8. EQT 2007 10-K
  9. NFG 2007 10-K
  10. OKE 2007 10-K
  11. SUG 2007 10-K
  12. SRE 2007 10-K
  13. Equitable Resources: Equitable Utilities: Equitable Gas
  14. Reuters Full Description: National Fuel Gas Co
  15. Reuters: Full Description: National Grid Transco
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