Chevron, which spent $2 billion more than it planned on exploration and production last year, is reviewing its entire U.S. midstream business -- the infrastructure used to transport and process oil and gas -- for potential sale. Shell, which promised to accelerate asset sales last month to revive earnings, is seeking buyers for a stake in a Texas pipeline.
“They’ve found that they are better off focusing their capital in drilling wells,” said Ryan Lewellyn, chief executive officer of Tall Oak Midstream LLC, an Edmond, Oklahoma company that invests in the assets. The returns on invested capital in midstream businesses tend to top out at about 20 percent, while exploration projects can deliver 50 percent or more, he said.
Buyers, such as Regency Energy Partners LP (RGP) and Kinder Morgan Energy Partners LP (KMP), have been lining up, flush with access to the debt and equity markets. They raised almost $61 billion in public debt and equity markets to spend on such deals last year, up from $49 billion a year earlier, according to Jefferies Group LLC. Acquisitions of midstream assets jumped last year even as takeovers in the rest of the energy sector slumped, data compiled by Bloomberg show.
Chevron, based in San Ramon, California, may take months to decide what to do with the U.S. midstream business and is unlikely to exit it entirely, people with knowledge of the matter said this week. It is already aiming to sell its 80 percent interest in the West Texas LPG Pipeline and other assets it acquired in its 2005 purchase of Unocal Corp., other people said last month.
Shell wants to sell part of its Houston-to-Houma crude oil pipeline and use some of the proceeds to invest in drilling projects, people said last month. If it and Chevron are successful, other large oil companies may also enter the market.
“Chevron is undertaking an ongoing evaluation of Chevron Pipe Line Company assets for possible divestiture” as part of its long-term strategy planning, said spokesman Gareth Johnstone. Shell didn’t return calls for comment.
“The majors have extensive midstream infrastructure,” said Hugh Babowal, a managing director in Wells Fargo & Co.’s investment bank who focuses on midstream energy deals. “We can expect to continue seeing assets coming out of them.”
Driving the deals is pipeline demand for the booming shale energy industry. A further boost is coming from buyers set up as master-limited-partnerships, which get tax breaks in exchange for distributing most of their income to investors. That encourages the firms to grow by acquisitions to increase payouts.
The MLP’s ability to raise funds in debt and equity markets will keep the purchases coming, said Raymond Strong, senior managing director with Evercore Partners Inc.
“The capital markets are still so strong,” he said in a telephone interview. “The market will definitely still be active.”
Acquisitions of pipelines globally rose 54 percent in 2013 from the previous year, to almost $42 billion, data compiled by Bloomberg show. That compares with a 35 percent drop in purchases of other energy assets, including coal producers and oil services companies, to $206.2 billion, the data show. Regency Energy Partners struck the largest U.S. deal last year with its $5.6 billion purchase of PVR Partners LP, a natural gas gathering and processing company.
“There is a lot of money pouring into midstream,” said Melinda Yee, a partner with Deloitte & Touche LLP who specializes in energy transactions. Big oil companies see “an opportunity to help them fund some of their drilling projects,” she said.
For the oil majors, the demand for the infrastructure is creating an opportunity to ditch less profitable assets to fund exploration. Chevron, which reported falling income and return on capital for 2013, plans to boost shale production in the Permian, Marcellus and Utica basins in the U.S. The horizontal drilling techniques used to extract shale typically costs $1 million or more than conventional oil and gas exploration, Tall Oak’s Lewellyn said.
The company, which had close to 9,000 miles of pipeline in the U.S. at the end of 2012, according to its most recent annual report, has said it will sell some assets as it prioritizes development of newly acquired exploration prospects in places such as Iraq, Canada and Australia.
The Hague-based Shell, meanwhile, pledged to speed up asset sales after making its first profit warning in a decade last month. The rising cost of developing fields saw capital spending at Shell reach a record $46 billion last year, well above the $33 billion it had targeted at the start of the year.
“Most of the majors still have midstream assets that aren’t necessarily core or strategic to what they are trying to achieve,” said Joseph Blount, chief executive officer of Century Midstream LLC, which buys assets including pipelines and processing plants.
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