Energen Corporation

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Energen Corporation

2101 Sixth Avenue North
Birmingham, Alabama 35203-2784
(205) 326-2700
Fax: (205) 326-2704
Web site: http://www.energen.com

Public Company
Employees: 1,437
Sales: $399.88 million (1996)
Stock Exchanges: New York
SICs: 1311 Crude Petroleum and Natural Gas; 4923 Gas Transmission and Distribution; 6719 Holding Companies, Not Elsewhere Classified

Headquartered in Birmingham, Alabama, Energen Corporation is a diversified holding company in natural gas distribution, exploration, and production. Its operating utility is the Alabama Gas Corporation (Alagasco). Alagasco serves more than 400,000 residential customers and 43 large commercial and industrial customers in a 22,000-square-mile service territory. Alagasco also transports natural gas for industrial and commercial users who purchase gas directly from producers. Energens subsidiaryTaurus Explorationexplores and produces natural gas for Energen and other companies.

Alagasco in the 1970s

During the 1970s, Alagasco was a mature natural gas utility with limited growth prospects. A poor regulatory environment existed in Alabama, with its public service commission committed to the traditional utility rate case process. Shareholder values were negatively affected by this limited growth potential, so in 1979 Energen was formed as a holding company for Alagascos increased earnings and enhanced shareholder value.

Energen dedicated itself to oil and gas exploration and production as a nonregulated energy business seeking diversified growth. Energen added other energy-related businesses over time; however, these were mostly short-term enterprises that were sold or discontinued. We learned that growing diversified earnings was not easy, Energen executives revealed in an annual report.

Thereafter, Energen concentrated on oil and gas exploration and production for diversified growth. Over the years, company management explained in an annual report, a variety of opportunities and challenges have influenced Energens operations, but our basic strategic focus has not changed. [W]e continue to work to provide shareholders with earnings growth superior to that offered by a pure utility by combining the strength of our utility with profitable diversification.

Changes in the 1980s

Pivotal changes occurred in the 1980s, accentuating the need for Energen to remain keenly competitive. First, gas prices collapsed early in the decade, leaving utilities to sort out messy legal and contractual problems with gas producers. State government regulators became more sympathetic to utilities at this time and were more willing to pass some costs of legal settlements to utility customers.

The regulatory mood in Alabama began to shift. Energen now found itself in a progressive regulatory environment. In particular, Rate Stabilization and Equalization (RSE) activity enacted by the Alabama Public Service Commission (APSC) affected Energen positively. In 1983, the APSC abandoned the traditional utility rate case process in favor of a rate-setting mechanism RSEto give state utilities opportunities to earn a return on average equities within a specified range. The commission approved quarterly adjustments in order for utilities to earn return on equity by the end of a given year. Rates increased annually depending on projected costs. A quarterly review of rates ensured that earnings fell within the allowable range.

Deregulation of well-head prices and interstate pipelines also proved beneficial to Energen. In the turbulent times of deregulation, Energen cooperated well with state agencies, which further enhanced the companys position in the new regulatory environment.

Operational changes initiated during the 1980s formed the foundation of Energens future business strategies. Energen began unbundling its services to large commercial and industrial customers at this time. The company first introduced flexible rate strategies to attract large customers in the deregulated market. Later the flexible rate strategies helped Energen address the possibility of released pipeline capacity from other utilities. In addition, Energen started the P Rate, which decreased pipeline costs for large transportation customers and lowered gas supply costs for residential customers.

Energen worked to keep gas utility rates low, since competition increased between gas utilities and the low-cost electricity providers in residential and small commercial markets. For example, Energen diversified its gas portfolio and took other measures to decrease gas costs.

After a long decline through the decade, the oil and gas industry reached its lowest point in 1986. U.S. consumption of gas dropped below any previous level. Though consumption of gas in the United States rose by 4.8 percent in 1987, demand projections for future years showed no more than a 3 percent increase annually, beginning in 1988. (Utility stocks were sensitive to inflation, so rates were expected to increase in 1988 as well.) In 1988, most state utility commissions agreed on a 13 percent rate of return on shareholders equity, so shares yielded about 7 percent.

During the mid- and late-1980s, Energen focused on growth and diversification to intensify shareholder value. In 1988 specifically, Energen grew through acquisitions. The company bought and improved local city gas systems throughout Alabama. Energens oil exploration activities also secured the companys footing. Energen found gas in northern Alabama that was easily accessible and had the potential to increase earnings when gas prices recovered. In light of these developments, industry analysts expected Energens earnings to increase about 16 percent in 1988.

In addition, federal tax credits were available for non-conventional fuel production until 1992, so Energens gas exploration and production subsidiary became increasingly important during the 1980s. Taurus Exploration took advantage of the tax credits and became a leading developer of coalbed methane in Alabamas Black Warrior Basin by the end of the decade.

Settling into the 1990s

Early in the 1990s, Energen stopped developing one coalbed methane project in spiteor becauseof its commitment to shareholder value. When the tax credits ceased in 1992, the project was no longer a viable vehicle for long-term growth. The company nevertheless continued operating coalbed methane wells in Alabama, but counted on conventional oil and gas for its long-term growth prospects.

In May 1994, Energen offered a stock repurchase plan. The company intended to buy back shares held in treasury in order to fund its employee savings plan and to meet other corporate obligations. At the time, Energen had 10.9 million outstanding shares.

In July 1994, Conoco, Inc. and Energen agreed to a five-year strategic alliance for coalbed methane programs. Under the agreement, Taurus Exploration provided consulting services for Conocos acquisition, exploration, and development activities. Conocos U.S. coalgas production came from the central Appalachian Basin, the San Juan Basin in New Mexico, and the Pocahontas gas project in Virginia. Conoco concentrated its overseas coalbed methane activities in France, Germany, and the United Kingdom. Taurus held about 1,000 coalbed methane wells in the Black Warrior Basin of Alabama and in Europe. (Until 1992, the company relied on the Section 29 tax credit to develop these coalbed methane holdings economically.)

The Mid-1990s

In 1995, Energen introduced a strategic plan for developing Taurus as an oil and gas exploration and production subsidiary. In fact, Energen initiated an overall diversified corporate growth plan beginning that year. The company planned to invest $500 million to the year 2000 to acquire additional properties, for offshore exploration, and for other developments. An early part of the plan included a three-and-a-half year agreement with Sonat Exploration regarding ongoing reserve acquisitions. Energens annual investment in the agreement was projected between $25 million and $50 million from 1996 through 1998. Energen bought oil and gas properties using $100 million of short-term credit throughout 1995 and 1996.

Company Perspectives:

Energen Corporation is a diversified energy company with headquarters in Birmingham, Alabama. To enhance shareholder value, Energen blends the financial and operating strength of its natural gas utility with the growth potential of its oil and gas exploration and production company. Alagasco, Energens natural gas utility, provides clean-burning, energy-efficient natural gas to more than 460,000 homes, businesses, and industries in central and north Alabama. Taurus Exploration, Energens oil and gas exploration and production subsidiary, focuses on building reserves and production by acquiring producing properties with developmental potential and supplementing returns with Gulf of Mexico exploration and development.

Energen offered $250 million of debt and common stock at varying terms in 1996 to finance its acquisition of properties, reduce debts, or meet other corporate needs. For instance, in September, the company sold $125 million in medium-term notes. Energen invested $26 million on conventional oil and gas reserves in 1996, but also allocated funds for an unexpected opportunity to develop non-conventional fuel through Taurus Exploration. In July, Energen purchased 105 billion cubic feet of coalbed methane reserves in the Black Warrior Basin from Houston-based Burlington Resources, Inc., at a cost of $61 million. Energen received 100 percent working interest in 100 wells on 19,000 gross acres with proven reserves in west central Alabama. Net annual production from the property exceeded 4.5 billion cubic feet, and production on 43 percent of the wells qualified to receive the non-conventional fuels tax credit through the year 2000. Mike Warren, president of Taurus Exploration, explained the purchase to Petroleum Finance Week: While our aggressive growth strategy continues to focus on conventional oil and gas activities, this unanticipated coalbed methane opportunity fits very well into our overall growth objectives.

In 1996 alone, Taurus spent $108 million on producing properties with development potential and another $18 million on offshore exploration and development of 12 wells in the Gulf of Mexico. From 1996 through 2000, Energen expected to invest $400 million buying properties to develop through its subsidiary. Energen committed another $100 million to offshore exploration and development in the Gulf of Mexico by Taurus.

Results in 1996 were remarkable. Taurus added 172 billion cubic feet of gas equivalent in 1996, increasing its total year-end reserves 164 percent. The subsidiarys oil and gas production rose 60 percent, and net income grew 28.5 percent.

Alagasco likewise earned 13.2 percent return on average equity in 1996, marking a record net income for the sixth consecutive year. Moreover, the Alabama Public Service Commission continued 1996s Rate Stabilization and Equalization through the year 2000, giving Alagasco the opportunity to earn between 13.15 percent and 13.65 percent return on earnings in the future. This ensured good service for Alagascos customers and also guaranteed shareholders a healthy return on investments. Everything seems to be going fine on the utility side, Michael C. Heim of A.G. Edwards and Sons told Petroleum Finance Week. Alagasco got an extension of its rate stabilization structure, which allows it to make adjustments annually to offset expenses and earn close to its authorized rate of return.

Overall, Energens earnings rose from $19.3 million in 1995 to $21.5 million in 1996. Fiscal 1996 was an excellent year for Energen from a financial perspective, said Energen chairman and chief executive officer Rex J. Lysinger in Petroleum Finance Week. But it was an even better year in terms of the tremendous success we achieved in implementing the first year of our aggressive, five-year diversified growth strategy.

Energen expected 1997 to be another exceptional year. Energens earning potential in 1997 is strong, noted the companys 1996 annual report. Fiscal 1997 could easily be Energens best year yet.

In July, Taurus acquired coalbed methane properties in the Black Warrior Basin owned by Amoco Corporation. Energen paid $72 million for the properties260 producing wells on 100,000 gross acres in Jefferson County, Alabamawith the potential to produce more than 7 billion cubic feet annually. (Taurus operated 170 Amoco wells since 1988.) Production from the wells qualified for non-conventional fuel tax creditswhich would increase annually with inflationuntil the year 2000. Taurus expected about $6 million in tax credits related to its coalbed methane production and anticipated a 70 percent increase in oil and gas production. According to Morgan Keegan and Companys David H. Tannehill, a gas utility analyst based in Memphis, in Petroleum Finance Week, Taurus management is good and the unit is run well. Its more conservative than other oil and gas producers because it has focused on acquiring properties to develop instead of to explore. So Taurus emphasis on producing properties with development potential makes its strategy reasonably low risk.

Beyond 1997

Industry analysts warned that the future of Energen might be quite different as it faces new challenges. For example, gas utilities throughout the nation considered implementing residential unbundling in the late 1990s. Residential unbundling called for offering separate services at separate prices to residential customers or offering them a choice of energy providers in order to gain market-driven pricing and improved efficiencies. But we do not need to unbundle our residential rates to be motivated to keep costs down and operate efficientlylongstanding competition has provided that impetus, explained Lysinger and William Michael Warren, Jr., president and chief operating officer, in Energens 1996 annual report. Neither do we see residential unbundling in Alabama generating significant earnings for Alagasco, as we already have extremely good market penetration.

Secondly, consolidation might be the norm in the next century for the electric and gas industries. Electric utilities began buying gas distributors in the 1990s, and a profitable company such as Energen might or might not be attractive as an acquisition. As of 1997, though, observers thought that Tauruss energy exploration activities would not interest electric utilities that are looking for large local gas distributors with markets outside of their typical service areas. Electric utilities also did not seem too interested in the Birmingham, Alabama, market.

In addition, Petroleum Finance Week analysts wondered if Tauruss exploration and production activities would not change investors perceptions of Energen in the long run, especially if Taurus accounted for half of Energens total earnings.

Energen, however, only saw itself bigger and stronger in the future, with increased earnings per share to 10 percent annually through fiscal year 2000. As corporate executives explained in the 1996 annual report: By the end of the century, we expect Taurus and Alagasco to be contributing about equally to consolidated earnings, and we are targeting consolidated ROE [return on equity] to exceed the utilitys return. Finally, we envision Energen as a much larger company, having a market capitalization of more than $500 million. As we move into the twentyfirst century, Energen will continue to rely on its strategic planning process to guide the companys operations and to evaluate future opportunities for enhancing shareholder value.

Principal Subsidiaries

Alabama Gas Corporation (Alagasco); Taurus Exploration, Inc.; EGN Services, Inc.

Further Reading

Conoco, Energen Make Global Coalgas Pact, Coal & Synfuels Technology, August 1, 1994, p. 6.

Conoco, Energen Set Alliance, The Oil Daily, July 6, 1994, p. 5.

Conoco, Inc., The Oil and Gas Journal, July 11, 1994, p. 30.

Energen Files Shelf Registration to Sell up to $250 Million of Debt and Common Stock, Petroleum Finance Week, September 9, 1996.

Energen Registers to Sell $125 Million of Medium-Term Notes, Petroleum Finance Week, September 23, 1996.

Energen to Buy Amoco Properties, The Oil Daily, July 10, 1997, p. 8.

Energen to Buy Back Stocks, The Oil Daily, May 27, 1994, p. 7.

Energens Taurus Exploration Unit Acquires Burlington Resources Black Warrior Assets, Petroleum Finance Week, July 22, 1996.

Mendes, Joshua, Gas Stocks with Glowing Dividends, Fortune, June 20, 1988, p. 111.

Taurus Supplies Much of Energen Corporations Fiscal 1996 Upward Earnings Kick, Petroleum Finance Week, November 11, 1996.

Charity Anne Dorgan