Company Buys Fayetteville Shale

Kinder Morgan Inc struck a $21 billion deal to buy rival El Paso Corp, combining the two largest North American natural gas pipeline companies and making a big bet on the fast-growing market for that fuel.

Despite weak natural gas prices, production of the fuel has been rising as energy companies pile into shale fields -- underground formations rich in oil and gas.

El Paso already owned the largest natural gas pipeline system in North America, with more than 43,000 miles of pipelines. The combined company would own 67,000 miles of natural gas pipelines and another 13,000 miles of pipelines to move refined products and other fuels, Kinder Morgan said on Sunday.

"We believe that natural gas is going to play an increasingly integral role in North America," Kinder Morgan Chief Executive Richard Kinder said in a statement. "We are delighted to be able to significantly expand our natural gas transportation footprint at a time when it seems likely that domestic natural gas supply and demand will grow at attractive rates for years to come."

The offer of $26.87 a share in cash, stock and warrants, represents a 37 percent premium to El Paso's Friday closing price of $19.59.

Including El Paso's debt, the deal tops $38 billion, making it the second biggest merger in 2011.

The deal derails El Paso's plan, announced in May, to split into two publicly traded companies, which would have separated its exploration and production business from its pipeline operations. Kinder Morgan said it plans to sell El Paso's exploration and production assets.

John White, an analyst at Houston-based Triple Double Advisors, said the deal makes perfect sense for both companies.

"El Paso has the largest natural gas pipeline in North America -- it's a tremendous and premium set of assets," said White, who helps to manage a portfolio of energy equities, MLPs and bonds. "They are doing this deal at a nice premium."

INFRASTRUCTURE CONSTRAINTS

Kinder Morgan is buying El Paso as companies including Exxon Mobil Corp and others are spending billions of dollars to develop shale gas and crude oil exploration and production in areas that are constrained by infrastructure.

For example, in the Eagle Ford Shale in South Texas where there are scant pipelines, companies are having to rely on trucks and are building rail terminals to handle the vast field's output.

Oil and gas producers could have to pay up to ship their gas on Kinder Morgan's pipelines if they are dealing with one behemoth, rather than two smaller pipeline companies. That could hit the bottom line for end users like power companies.

The combined company's pipelines will be connected to natural gas shales including the Eagle Ford, Marcellus, Utica, Haynesville, Fayetteville and Barnett.