Southwestern Energy Drills for Major Overhaul

Southwestern Energy Co. of Fayetteville is likely to move its headquarters to Houston when — and if — a buyer is found for its Arkansas Western Gas Co., according to president and CEO Harold Korell.

Unencumbered by the utility that has kept it bound to Fayetteville, Southwestern could easily shift its remaining business — oil and gas exploration and production (E&P) — to the industry Mecca where it has been licensed for business since 1978.

But how soon Arkansas could lose yet another publicly traded company is anyone’s guess. Three months after being slammed with a $109 million verdict in a royalty dispute and announcing plans to raise the money by selling the utility, Southwestern apparently has no buyer in sight.

“We’re in a period of such transition,” Korell said. “The name of the game is uncertainty.”

Although Korell had no comment on prospective buyers or Arkansas Western’s price tag, industry analysts are optimistic.

“The sale of the utility is hampering the stock value,” said Scott Burk, E&P analyst for Frost Securities Inc. “[After the sale] I’d expect to see an upward move of five bucks immediately.”

Southwestern Energy’s stock price has ranged between $8 and $9 a share in recent days.

The utility should fetch $150 million, bringing the company’s net asset value to $13 per share or $334 million total, Burk said.

“They’ll be able to fill the hole, to come out of it as a pretty strong E&P company,” said Kenneth Beers, E&P analyst for Johnson Rice & Co. in New Orleans.

Streamlined Business

That would be a streamlined operation. The company has traditionally been in both the E&P and the natural gas distribution business.

Just as in a game of Monopoly, utilities offer fairly stable cash flow but minimal opportunity for expansion. The E&P business, by contrast, presents higher risks and potentially higher rewards.

Former CEO Charles Scharlau liked a balance between Southwestern Energy’s two sides. But since January of 1999, when Korell became CEO, Southwestern Energy’s E&P division has taken the spotlight.

Korell instigated a major overhaul within the company, replacing almost everyone in exploration and half the staff of the entire E&P division.

“The growth opportunities on the E&P side are definitely more attractive,” Burk said.

In May, Southwestern Energy sold its Missouri utility, Associated Natural Gas Co., to Dallas-based Atmos Energy Corp. for $32 million. A division of Arkansas Western Gas, the utility supplied natural gas to 48,000 customers.

Profit from the sale hardly alleviated the $66.7 million owed after taxes from the lawsuit in which 4,000 plaintiffs claimed they were underpaid royalties. Southwestern Energy reported a net loss of $64.2 million for the second quarter of 2000.

Southwestern Energy expected to win the Arkansas Supreme Court appeal, and the denial prompted immediate action from the company. Less than a week after the judgment came down, the “for sale” sign popped up for Arkansas Western Gas. The company also suspended indefinitely payment of any quarterly dividends on its common stock.

The verdict only speeded up Korell’s ultimate plan of action, Burk said.

“They would probably have sold [the utilities] later, sometime down the road,” he said.

Now, the budding company faces another class-action lawsuit in the same court where it lost before. Nine people filed suit in Sebastian County Circuit Court in late August in another dispute over royalties.

Southwestern Energy has refuted the claims concerning the Stockton Gas Storage Unit in Franklin County, and Burk said a small suit shouldn’t harm the company.

Holding the Bag

When the sale of Arkansas Western Gas is final, only northwest Arkansas stands to lose in the deal.

“We will still have a presence in Arkansas for sure, but nothing like we have now,” Korell said.

In 1999 Southwestern Energy employed five of the 75 highest paid executives in Arkansas, and Korell’s compensation ranked 19th at $636,811. Chief operating officer Alan Stevens followed Korell at No. 32 with $429,585 in total compensation.

Southwestern Energy employs more than 650 people in the area. Korell has said that some jobs will be lost in a move to Houston, but no definite numbers have been declared.

If Southwestern Energy heads for Texas, corporate positions would most likely move with it. However, a large utility company could purchase Arkansas Western Gas and move the whole gas operation out of state.

Currently, the E&P division of South-western Energy operates mainly from three drilling ventures, with drilling in the Permian Basin program proving most successful. One of the wells in New Mexico produces about 190 barrels of oil per day and 180,000 cubic feet of gas per day, according to company records.

Other sites for Southwestern Energy’s E&P include the Arkoma Basin and the Gulf Coast. While investors wait to see where the sale of the utility will lead the company, analysts such as Burk believe in the business’ potential.

“We think they’re a nice little company,” Burk said.