Strategy  Still a Good Reason for a Transaction

As printed in the August, 2002 PetroGrowth Advisors Newsletter

 

In recent years, companies have pursued transactions for many of the wrong reasons - get bigger, ego, or just to do a transaction. Ultimately, these deals turn out as they should - negatively. Instead, management should focus on a long forgotten term - strategy - in determining their growth plans.

 

What makes a transaction a strategic fit ?  This can be judged from many perspectives.

•  Is it a good value?

•  Does it position the company better - in terms of asset mix, growth or exit options?

•  Does it remedy a problem or competitive weakness?

•  Does it provide a 'building block' for a follow-on transaction (and, no, issuing high yield debt should not be the follow-on transaction)?

 

A recent transaction that did not receive much attention could ultimately provide fantastic results for the buyer and seller - and be a great example of strategic thought. On May 6, 2002, Denbury Resources Inc. acquired the General Partner of Genesis Energy, L.P., a publicly traded Master Limited Partnership. Denbury is the largest oil and natural gas operator in Mississippi, holds key operating acreage onshore Louisiana, and has a growing presence in the offshore Gulf of Mexico area. Genesis is engaged in two primary lines of business: crude oil gathering and marketing and pipeline transportation (with a significant Mississippi presence).

 

Why is this a strategic fit for Denbury?

• With its emphasis in Mississippi (with its concentrated transportation providers), it gives them some control over getting its product to market and the pricing of it.

• Potentially creates a capital source for developing the pipeline system needed to develop their oil fields - thus allowing it to focus its capital on its core activity of drilling.

• Potentially extracts more value for its CO₂ and pipeline assets.   Buried within the company, these assets' value is implied in the 3x multiple the stock is currently trading for. If a deal could be structured with Genesis, the MLP would value the consistent cash flows associated with these assets at multiples closer to 6x - a significant value enhancement.

•   With the total consideration of $2 million needed to 'control' the Genesis assets, Denbury has limited exposure.

• Don't forget the upside associated with the MLP structure and the incentive splits for the General Partner.  If Genesis can grow, it will certainly provide significant returns to Denbury.

 

What about Genesis Energy, LP?

•  Denbury provides a stable sponsor.  With solid financials and critical mass, Denbury as the General Partner allows Genesis to pursue a growth strategy.

•  Denbury's internal growth has the capability to indirectly and directly provide controllable growth to Genesis - key for a MLP.

•  Denbury is a source of crude commitments that allows Genesis to expand pipelines with some form of certainty of its economics.

 

With the potential benefits for each side, this could be a win-win result.

 

PetroGrowth Advisors originated this transaction and advised Denbury in its completion. According to Phil Rykhoek, Denbury CFO, "PetroGrowth saw the full story clearly and helped us to see the full potential." Mark Gorman, CEO of Genesis, confirms the strategic opportunities calling the Denbury acquisition "...a perfect fit. Swartzwelder turned big picture thinking into real world execution."

 

PetroGrowth Advisors welcomes the opportunity to discuss your company's objectives and strategic direction.  Its breadth of experiences and contacts could offer a new dimension to your decision process.