Energen Corporation

605 Richard Arrington Jr. Boulevard North
Birmingham, Alabama 35203
U.S.A.
Telephone: (205) 326-2700
Fax: (205) 326-2704
Web site: http://www.energen.com

Public Company
Incorporated: 1978
Employees: 390
Sales: $987.44 million (2017)
Stock Exchanges: New York
Ticker Symbol: EGN
NAICS: 211130 Natural Gas Extraction; 211120 Crude Petroleum Extraction

The Energen Corporation is an oil and natural gas development and extraction company whose operations stretch across New Mexico and western Texas. Concentrated almost exclusively on the sprawling oil and natural gas fields of the Permian Basin, Energen's assets are known to contain more than 444 million barrels of oil equivalents (BOE), with the potential for another 2.7 billion BOE. Although the company is headquartered in Birmingham, Alabama, most of its employees work in Texas. Formerly the owner of the Alabama Gas Corporation (Alagasco), Alabama's largest natural gas distributor, the company divested those operations during the early 21st century to focus on oil and gas exploration and drilling.

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, a year after incorporating, Energen was organized as a holding company for Alagasco's increased earnings and enhanced shareholder value.

Energen dedicated itself to oil and gas exploration and production as a nonregulated energy business seeking diversified growth. It 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 Energen's 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.”

The regulatory mood in Alabama began to shift. Energen 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, RSE, to give state utilities opportunities to earn a return on average equities within a specified range. The commission approved quarterly adjustments for utilities to earn a 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 company's position in the new regulatory environment.

Operational changes initiated during the 1980s formed the foundation of Energen's future business strategies. Energen began unbundling its services to large commercial and industrial customers at that point. 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 during this period, because competition was increasing 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. Although consumption of gas in the United States rose 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 shareholder's 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. Energen's oil exploration activities also secured the company's 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 Energen's earnings to increase about 16 percent in 1988.

In addition, federal tax credits were available for nonconventional fuel production until 1992, so Energen's 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 Alabama's Black Warrior Basin by the end of the decade.

During the early 1990s Energen stopped developing one coalbed methane project. 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 to fund its employee savings plan and to meet other corporate obligations. At the time, Energen had 10.9 million outstanding shares.

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. It planned to invest $500 million until 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. Energen's 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.

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 example, in September it 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 nonconventional fuel through Taurus Exploration. In July Energen purchased 105 billion cubic feet of coalbed methane reserves in the Black Warrior Basin from the Houston-based Burlington Resources, Inc., at a cost of $61 million. Energen received a 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 nonconventional fuels tax credit through 2000.

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 to 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 subsidiary's oil and gas production rose 60 percent and its net income grew 28.5 percent.

In July 1997 Taurus acquired coalbed methane properties in the Black Warrior Basin owned by the Amoco Corporation. Energen paid $72 million for the properties (260 producing wells on 100,000 gross acres in Jefferson County, Alabama) with the potential to produce more than 7 billion cubic feet annually. (Taurus had operated 170 Amoco wells since 1988.) Production from the wells qualified for nonconventional fuel tax credits, which would increase annually with inflation until 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.

Industry analysts warned that Energen's future could be quite different as it faced new challenges. For example, gas utilities throughout the nation considered implementing residential unbundling during the late 1990s. Residential unbundling called for offering separate services at separate prices to residential customers or offering them a choice of energy providers to gain market-driven pricing and improved efficiencies. “We do not need to unbundle our residential rates to be motivated to keep costs down and operate efficiently—long-standing competition has provided that impetus,” explained Rex J. Lysinger, the chair and CEO of Energen, and William Michael Warren Jr., the president and COO, in Energen's 1996 annual report. “Neither do we see residential unbundling in Alabama generating significant earnings for Alagasco, as we already have extremely good market penetration.”

Another challenge was the possible threat of consolidation within the industry. However, Energen only saw itself bigger and stronger in the future. 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 utility's return. Finally, we envision Energen as a much larger company, having a market capitalization of more than $500 million. As we move into the twenty-first century, Energen will continue to rely on its strategic planning process to guide the company's operations and to evaluate future opportunities for enhancing shareholder value.”

The one fault in management's vision of the future was underestimating its abilities. The senior officers projecting a market capitalization of $500 million stood atop a company with a $4.5 billion market capitalization 12 years later, as Energen thoroughly transformed itself through aggressive expansion. The company, once just a local utility serving Alabama, became one of the 20 largest independent energy concerns in the United States, achieving its impressive growth by leaning on its most important subsidiary: Energen Resources.

During the second half of the 1990s Energen more than made good on its promise of spending $500 million on acquiring energy properties. Preferring gas assets to oil assets, the company spent the years entrenching its position in the San Juan Basin, the Black Warrior Basin, and the Permian Basin. It supplied Energen Resources with the capital to pursue an extraordinarily aggressive expansion campaign. Between 1996 and 2000 Energen Resources spent $510 million on property acquisitions, $185 million in related development, and $80 million in exploration and associated development. By year-end 2000 Energen Resources' oil and gas reserves totaled 1.1 trillion cubic feet equivalent.

Energen had no intention of slowing its pace of expansion in the new century. Warren, who had been promoted from the CEO of Energen Resources and Alagasco to the CEO of Energen in 1997 and chair of the holding company in 1998, led the charge forward. He directed his senior officers to scour the North American energy market for new properties with significant amounts of proved undeveloped reserves. The search uncovered a wealth of suitable acquisition candidates, primarily gas properties that became part of Energen Resources' portfolio. Between 2000 and 2005 Energen Resources spent roughly $700 million on new property acquisitions, which lifted revenues in 2005 above the $1 billion mark for the first time in the holding company's history. After spending $1.2 billion on property acquisitions during the previous decade, Energen Resources possessed oil and gas reserves with 1.7 trillion cubic feet equivalent.

Energen's holdings in the Permian Basin grew once more in 2012, as the company spent $65.8 million to pick up several thousand more acres in Texas. Besides acquiring property there, Energen was pouring most of its exploration and extraction budget into the Permian Basin, where operations accounted for $855 million of the company's $890 million development and drilling expenditures for fiscal 2012.

During the second decade of the 21st century Energen's focus on the Permian Basin only intensified as promising exploration and extraction results, along with ongoing changes in other energy sectors, inspired the company to all but abandon some of its other endeavors, at least for the time being. In 2013 the company sold its Black Warrior Basin coalbed methane holdings and invested most of the $160 million proceeds in the Permian Basin operation. Any lingering doubts regarding Energen's priorities were erased in 2014, when it sold Alagasco to the St. Louis-based Laclede Group Inc. for $1.6 billion.

“This transaction allows Energen to clarify its corporate structure by becoming a pure exploration and production company, a trend being rewarded by the financial markets,” explained McManus, as quoted by Michael Tomberlin in the Birmingham News. The sale also allowed Energen to retire a great deal of its short-term debt, strengthening its financial position as it prepared to ramp up its Permian Basin operations even further. In 2015 McManus officially announced the kickoff of a multiyear $1 billion development campaign, to be funded in part by a new public offering of 5.7 million shares of its common stock. Meanwhile, the increased capital investments appeared to be paying off for Energen, as it reported a 19 percent year-to-year jump in oil production.

The year 2016 found Energen pulling out of the San Juan Basin entirely and selling a few assets in the Delaware portion of the Permian Basin. It also purchased 9,000 more acres in the Permian Basin. Unfortunately, the expansion spree over the past few years had coincided with a sharp downturn in the petroleum market, leading the company to post a net loss of $945.7 million in 2015, followed by a $167.5 million loss in 2016. By year-end 2017 the market had rebounded somewhat, while increased production helped the company rebound to a respectable net income of $306.8 million, roughly what it had been prior to the downturn.

Despite the financial turnaround, a contingent of Energen's shareholders, led by the Corvex Management hedge fund, remained concerned that the company's stock price had not improved along with its other indicators and began pressuring the company's board to place Energen up for sale, hoping for a faster, more profitable return on their investment. By early 2018 Corvex had formed an alliance with the billionaire Carl Icahn, who also purchased a significant stake in the company. That May, Corvex and Icahn stated in a regulatory filing that they were considering buying Energen outright. Although all parties declined to comment further on the issue, Energen's days as a publicly traded company appeared to be numbered.

Charity Anne Dorgan
Updated, Jeffrey L. Covell; Chris Herzog

Energen Resources Corporation.

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