Phillips Petroleum Co. and Duke Energy Corp. have wowed Wall Street with their plan to merge their midstream natural gas businesses into a separate joint venture. Analysts expect Phillips to make significant reserve or property acquisitions now, as it concentrates on expanding its E&P operations. Duke Energy becomes less of a utility and more of a diversified energy supplier by linking its own midstream gas holdings with Phillips's gas processing and marketing unit. The merger is of Denver-based Duke Energy Field Services and Phillips' GPM Corp., forming the largest gas gathering, transporting and marketing company ever. "In fact, we would not be surprised if some divestitures were required-particularly in Oklahoma-to satisfy Hart-Scott-Rodino [antitrust] concerns," writes Stuart J. Wagner, analyst with Petrie Parkman & Co., Denver. The new Duke Energy Field Services will operate 67 plants and 57,000 miles of pipeline. It will produce 400,000 bbl. per day of gas liquids. George J. Gaspar of Robert W. Baird & Co. Inc. in Milwaukee says, "I believe there is a real positive on the upstream side of the business, and that's where I believe Phillips is going to concentrate more effort. The emergence of this combined effort, and the capturing of $1.2 billion by Phillips, is going to lead to what I believe will be a significant reserve and property acquisition." The new company is expected to have an enterprise value of between $5-and $6 billion. Duke Energy Field Services will pay Phillips and Duke Energy each $1.2 billion upon closing, which is expected by the end of the first quarter. Duke Energy will own about 70% of the new company; Phillips, about 30%. After closing, an initial public offering of about 20% of Duke Energy Field Services is expected; Duke Energy would then own 55% and Phillips, 25%. Proceeds of the IPO will be used to reduce Duke Energy Field Services debt, which will be incurred when paying the parent and Phillips a total of $2.4 billion. "This venture allows Phillips to monetize the gas processing and marketing unit, freeing up capital to focus on the upstream," says L. Bruce Lanni, who follows the majors for CIBC World Markets in New York. Gene Gillespie of Howard, Weil, Labouisse, Friedrichs Inc. in New Orleans, says the deal was an excellent move on the part of Phillips. "It really won't affect their refining and marketing. They will continue to have access to the gas liquids. They are basically selling the hardware into a company that they will still have partial control of, even after the IPO." He believes proceeds from the deal will go toward Phillips' exploration and production program. "They've underspent on upstream, and that's the area where they need to reinvest," Gillespie says. -Paula Dittrick