El Paso gets cash infusion for drilling

Nabors Industries, Lehman Brothers ante up $350M

Petroleum News

El Paso, Nabors Industries and investment bank Lehman Brothers have worked out a three-way deal that will provide cash-strapped El Paso with an additional $350 million to drill its prospects both offshore and onshore in the Gulf of Mexico.

El Paso said it will contribute another $150 million to the partnership as part of its existing 2003 and 2004 capital budget, making the joint venture worth $500 million, the companies said.

From this pot of cash, El Paso intends to step up its drilling program over the next year with 55 wells in North Louisiana, 20 wells offshore gulf, 35 wells in South Texas and 15 wells on the Gulf Coast. El Paso is under the gun because many of the leases are said to be close to expiring.

“These agreements allow us to accelerate the drilling of our inventory within our existing capital spending budget,” said Rod Erskine, president of El Paso's production segment.

El Paso has been in cost-cutting mode, shaving about $1 billion from its capital spending budget this year, with more cuts planned in 2004. The company's current budget is about $1.3 billion.

Under terms of the deal announced Oct. 10, Lehman will provide 50 percent or $250 million of total cash to finance two packages of wells. In exchange, Lehman will get a 50 percent net profits interest on cash proceeds available after royalties and operating costs have been paid.

Nabors will provide 20 percent or $100 million for a 20 percent net profits interest.

Once a specified payout is achieved, Lehman's and Nabors' net profits interest will convert to an overriding royalty interest in the wells for the remainder of the wells' productive lives, according to deal terms. The agreements give all parties a right to cease further investment with 30 days notice.

It is anticipated that 54 percent of the estimated $500 million in total capital will be invested under agreements with El Paso Production Co. and El Paso Production GOM and the balance invested with El Paso Production Oil & Gas, L.P.

El Paso already is one of Nabors' largest contract drilling customers.

“Their (El Paso) prospects inventory is known to be of high-quality and they have an excellent track record of execution in the E&P business,” said Gene Isenberg, Nabors' chairman and chief executive officer. “We welcome the opportunity to broaden our relationship.”

Lehman has been an active participant in oil and gas transactions involving exploration and production independents. In 1999, the investment bank did two deals with Cross Timbers (now XTO Energy) totaling $471.3 million.