Western Gas Resources, Inc.
Western Gas Resources, Inc.
Sales: $3.3 billion (2000)
Stock Exchanges: New York
Ticker Symbol: WGR
NAIC: 486210 Pipeline Transportation of Natural Gas; 211112 Natural Gas Liquid Extraction
Western Gas Resources, Inc. is an independent gatherer, processor, transporter, and marketer of natural gas and natural gas liquids. The company’s Denver, Colorado, headquarters are centrally located near its 18 gas gathering and processing operations in the gas-producing basins of the Rocky Mountains, mid-Continent, Southwest, and Gulf Coast regions. Western Gas operates over 8,000 miles of pipeline. It also markets natural gas and natural gas liquids, such as ethane, propane, and butane, ranking as the 14th largest producer of these products in the United States. The company, founded and primarily operated by highly skilled engineers, has gained a well earned reputation for its ability to thrive under economic conditions that have driven similar companies out of business.
Birth of Predecessor to Western Gas: 1971
One of the founders of Western Gas was Brion G. Wise, the longtime chairman of the company. After earning a bachelor of science degree in chemical engineering from Washington State University in 1967, he went to work for Shell Oil Co. as a gas processing engineer in its natural gas development group. During his four years at Shell he became familiar through his business travels with the cities of Houston, New Orleans, and Denver. Preferring life in Denver he teamed with three others in the city in 1971, pooling $2,400, to form a company called Ecological Engineering Systems. Wise had conceived of an idea for the business while traveling for Shell. He saw a number of flaring wells, gas set ablaze as a byproduct of drilling for oil. His plan was to contract with oil producers to capture the gas, rather than let it go to waste, then process, transport, and market the gas and any natural gas liquids that might be present. When the partnership bought its first processing plant in 1977, it changed its name to Western Gas Processors and became increasingly more involved in the gathering and processing of gas in the Rocky Mountains region.
A number of factors converged in the 1980s that created an environment conducive to Western Gas and its highly trained team of executives. The industry backdrop was described by Barron’s in a 1993 profile of the company: “After the easing of federal regulatory reins in the 1980s, a number of interstate gas pipelines abandoned the natural-gas gathering and processing business. At the same time, with prices for fossil-fuel products in the doldrums, oil companies shrank their domestic operations, including gas gathering and processing, as they shifted their spending to more promising foreign shores. And all this happened as demand for natural gas slid below expectations and the long-lived gas surplus, or ’bubble,’ continued to depress prices.” Not only did Western Gas contract with major oil producers to gather gas at their reserves, it took advantage of these cheap prices to pick up a number of properties that it deemed to hold great potential. To offset low gas prices, the company used its administrative and technical expertise to reduce personnel and to add well hookups. Because the major investment was in setting up the plant, the additional hookups cost relatively little.
Formation of Master Limited Partnership: 1987
To raise capital in order to fuel an ambitious plan to acquire more properties, Western Gas Processors in 1987 went public as a master limited partnership (MLP), which was similar to a Real Estate Investment Trust (REIT) in that it was free of corporate income tax. Instead of shares, investors purchased units of the MLP, which were then traded just like stock. All of an MLP’s earnings were distributed to unitholders, who were then individually responsible for paying taxes. Created by Congress in 1960 as a way for small investors to become involved in real estate, REITs had been rarely used, prompting Congress to make changes to the concept, which were embodied in the Tax Reform Act of 1987. Not only did these changes increase the use of REITs, the new law extended the exemption from corporate taxes to MLPs. This provision allowed companies like Western Gas to buy assets that were unattractive to “C” corporations taxed both at the corporate and investor level. The goal was to spend $100 million on properties over the next five years.
Despite its many advantages, the MLP structure, however, proved somewhat limiting. Western Gas could use cash and units to buy assets from corporations but was unable to buy companies outright. Moreover, institutional investors such as mutual funds were limited in their ability to hold MLP units. In 1989 Western Gas Resources, Inc. was formed in order to purchase a majority interest (52 percent) in Western Gas Processors, Ltd. Not only would the new corporation share in the MLP’s quarterly distribution of profits and maintain a competitive edge in the acquisition of certain properties, it could also use its stock to acquire other assets, which would then be sold to the MLP, in effect coupling the tax advantages of the partnership with the flexibility of a corporation. Access to major institutional investors, however, remained limited. In 1991 the corporation bought the remaining 48 percent of the MLP, and unitholders received shares of Western Gas stock on a one-for-one basis. As a result of this restructuring the MLP was eliminated and Western Gas, trading on the New York Stock Exchange, operated like any other C Corporation.
Western Gas quickly exceeded its five-year $100 million acquisition commitment, as gas prices continued to flounder, providing the company with a number of choice acquisition candidates and the opportunity to expand into other gas producing basins. By the end of 1991 Western Gas had spent more than $200 million on new properties, $142.7 million alone on the gas processing operations of Union Texas Petroleum Holdings. The UTP deal included 12 plants in Texas, Oklahoma, and Louisiana, as well as 5,260 miles of pipelines. Also in 1991 Western Gas paid $36 million to Amoco Production Co. for the Edgewood Gas Processing Plant located in Texas. Revenues that stood at $139 million in 1988 grew to $358 million in 1991, then began an even sharper rise over the next few years as contributions from new acquisitions began to fatten the balance sheet.
With the UTP acquisition fully integrated in 1992, Western Gas boosted revenues to $600 million, while earning a record $39.7 million. After raising $33.4 million in a secondary public offering of stock, as well as renegotiating its outstanding lines of credit, the company was poised to make further acquisitions in 1993. In July of that year it completed the $168.2 million purchase of Denver’s Mountain Gas Resources Inc., gaining two gathering and processing facilities in the Greater Green River Basin of Wyoming, an area considered underdeveloped and possessing great potential. Western Gas spent an additional $17.7 million to acquire the 22 percent interest it did not control in one of the plants, and also invested $15.2 million to complete the construction of a cryogenic processing plant for the production of natural gas liquid products. In September 1993 Western Gas also acquired a 69 percent interest in the Black Lake gas processing plant in Louisiana, paying in excess of $136 million. As part of the deal, Western Gas gained a 50 percent interest in the Black Lake Pipeline Company and its 240-mile liquids pipeline that ran from Cotton Valley, Louisiana, to Mont Belvieu, Texas. The company also formed a partnership with Westana Gathering Company to create the Panhandle Eastern Pipe Line Corporation, which was to service the Anadarko Basin in Oklahoma. In addition, Western Gas completed the $90 million construction of the Katy Gas Storage Facility, located 20 miles outside of Houston, which was ready to begin operations in January 1994. The company also established a small presence on the East Coast in 1993 when it purchased the assets of Citizens National Gas Co., a small Boston marketing company. Again, Western Gas showed remarkable improvement over the results of the previous year, growing by over 50 percent to $932 million. The next year the company would eclipse the $1 billion mark in sales. There appeared to be a number of acquisition candidates still available in the fragmented natural gas industry. Because so much of the company’s sources of gas remained offshoots of oil drilling, however, Western Gas was vulnerable to a slide in the worldwide price of oil, which would curtail drilling activities.
Falling Oil Prices Stalling Movement in 1998
The company continued to acquire assets over the next two years. It paid approximately $26 million in late 1994 for the assets of Oasis Pipe Line Co., including 14 gathering systems in the Permian Basin that spanned Texas and Louisiana, as well as two treating facilities and 600 miles of pipeline, which were then connected to the Katy operation. In 1995 Western Gas acquired further assets in the Permian Basin at a cost of $18.7 million, adding eight West Texas gathering systems and 230 miles of pipeline. It also teamed with DDD Energy, Inc. to create the Redman Smackover Joint Venture to work gas fields in the Smackover formation of East Texas, paying $5.4 million for a 50 percent interest. Revenues reached $1.25 billion in 1995, then cracked the $2 billion mark in 1996, followed by sales of $2.38 billion in 1997, at which point momentum began to stall. Oil prices plummeted, and saddled with over $500 million in debt from its aggressive pattern of growth, the company was forced to adjust. Sales dipped to $2.1 billion in 1998 and the company posted a loss of $67 million.
We provide a broad range of services to our customers from the wellhead to the sales delivery point.
In a two-year period, Western Gas sold off assets to shed debt. It sold its Perkins Facility for $22 million. In two separate transactions with Vintage Petroleum of Tulsa, Oklahoma, the company sold its Edgewater facility and associated East Texas producing properties, as well as its stake in the Redman Smackover Joint Venture, for $55.8 million. Western Gas sold its Giddings Facility for $36 million. The company also sold its wholly owned subsidiary, Western Gas Resources Storage, Inc., for $100 million, as well as Western Gas Resources California for almost $15 million and subsidiary Pinnacle Gas Treating for $38 million. Moreover, Western Gas became more actively involved in procuring an alternative source of gas unaffected by oil prices: coalbed methane gas.
Although the coalbed wells were small and the gas of low quality, drilling was easy and the quantity plentiful enough to make it a highly attractive niche for companies like Western Gas. It quickly acquired land positions in the coalbeds of Wyoming’s Power River Basin. Because the methane was located close to the surface, a well could be drilled in a single day, to depths of just 300 to 1,000 feet, at a cost of only $50,000 to $65,000, using truck-mounted rigs generally used to drill water wells. The life of these methane wells would generally run seven years. Western Gas gained an additional benefit because its involvement in the area lent credibility to the drilling, attracting additional producers who would then bring business to its pipeline in the area. Drilling activity was so robust that it justified an investment to triple the capacity of the pipeline.
The company’s restructuring efforts were reflected in the results for 1999. Although revenues fell to $1.9 billion, the net loss for the year was cut to $17.1 million. Going forward, however, Western Gas was much better positioned to weather future downturns in commodity prices. When gas prices rebounded in 2000, the company renewed its long-term pattern of growth. Revenues increased by 72 percent over 1999, almost reaching $3.3 billion, as the company realized a net income of $56.1 million. The company’s stock price, which dipped to $15.50 in April 2000, climbed to $34.50 in April 2001. Western Gas made plans to use as much as $100 million in available cash flow to fund a renewed expansion effort, concentrating on the low-cost, low-risk coalbed methane play in the Powder River Basin of Wyoming. The company also broke ground on a new corporate headquarters to better accommodate future expansion. The greatest possible threat in the short term for the company was its becoming a possible takeover target, as industry analysts in 2001 took note of Shell’s interest in acquiring companies involved in the coalbed methane segment. To fend off such a takeover bid, Western Gas adopted a shareholder rights plan that would go into effect if a person or group gained control of 15 percent or more of the company’s stock. Having to worry about such a possibility, however, simply testified to the success of Western Gas and its potential for even greater growth.
Western Gas Resources-Texas, Inc.; Mountain Gas Resources, Inc.; Western Gas Wyoming, L.L.C.
Kinder Morgan, Inc.; TransMontaigne Inc.
- Ecological Engineering Systems is established.
- Company name is changed to Western Gas Processors.
- Company goes public as a master limited partnership (MLP).
- Western Gas Resources, Inc. is created to serve as general partner of MLP.
- Western Gas Resources absorbs MLP.
- Company surpasses $1 billion in annual revenues.
- Company surpasses $3 billion in annual revenues.
Aven, Paula, “Gas Drilling Soars in Powder River,” Denver Business Journal, December 14, 1998.
Byrne, Harlan S., “Western Gas Resources,” Barron’s, May 3, 1993, pp. 37-39.
Mehlman, William, “Western Gas’ Performance Defies Gas Price Recession,” Insider’s Chronicle, November 4, 1991, p. 1.
Wells, Garrison, “Western Gas Booms During Industry Slump,” Denver Business Journal, July 24, 1992, p. 3.
“Western Gas Resources,” Fortune, September 9, 1991, p. 151.
“Western Gas Resources, Inc.,” Oil & Gas Investor, October 1999.