Hess Corp., the most active oil driller in North Dakota’s Bakken last year, agreed to sell a 50 percent stake in its processing and pipeline unit in the region to private equity firm Global Infrastructure Partners for $2.675 billion in cash.
The companies are forming a midstream joint venture called Hess Infrastructure Partners, New York-based Hess said in a statement Thursday. The venture will include a natural gas processing plant, rail-loading terminal and rail cars as well as crude oil pipelines and trucks.
Hess rose the most in almost six months on the news. The company will get a total of $3 billion in cash from the transaction, including $300 million from a debt sale by the joint venture. It still plans to sell a stake in the business to the public this year to garner more cash.
“They really pulled this out of a hat,” said Fadel Gheit, a New York-based analyst for Oppenheimer & Co. who rates the shares the equivalent of a buy and doesn’t own them. “We had expected them to get $1.5 billion to $2 billion by selling midstream as a master-limited partnership. Now they’re going to get $3 billion for half of it.”
The boom in output from the Bakken formation during the past decade has forced companies to increasingly rely on rail cars and trucks to move their product. Fracking and horizontal drilling in Bakken have made North Dakota the largest oil-producing U.S. state after Texas, according to the Energy Information Administration.
Proceeds from the sale will “more than cover” a cash-flow gap expected this year from low oil prices, Chief Financial Officer John Rielly said Thursday on a conference call with analysts. Leftover cash may be used for acquisitions and share buybacks, Chief Executive Officer John Hess said on the same call.
Hess rose 4.9 percent to $68.83 at the close in New York, its biggest gain since Dec. 19. The climb wiped out almost half of its decline year-to-date.
Global Infrastructure Partners, with offices in New York, London and Sydney, manages about $15 billion of funds invested in energy, power and transport. Holdings include stakes in Freeport LNG, a natural-gas shipping terminal in Texas, and London and Edinburgh airports, according to its website.
“The joint venture with its strategically located assets will be one of the largest midstream operators in the Bakken,” John Hess said in the statement. “The joint venture will be in a strong position to fund future energy infrastructure investments and continue to grow its midstream business.”
North Dakota officials have called for companies to reduce flaring, the burn off of gas produced with oil in the state. A lack of available infrastructure has caused about a third of the natural gas in the state to be flared instead of piped to customers.
Hess has other midstream operations in West Texas, the Gulf of Mexico and in the Utica Sale of Ohio and Pennsylvania. Those could be sold to Hess Infrastructure, Rielly said. The venture may also buy assets from other companies in the Bakken or elsewhere.
The Bakken divestiture will reduce Hess’s 2015 capital spending to $4.1 billion from $4.4 billion, Rielly said.
Hess has sold or closed its refineries and gasoline stations in recent years to focus on oil and gas production. In April, Hess reported its first adjusted quarterly loss in almost six years after oil prices fell below $45 a barrel. The company is expected to have negative cash flow this year.
“An expectation that oil prices could stay lower for longer may have motivated Hess to monetize its Bakken assets,” Vincent Piazza and Gurpal Dosanjh, analysts for Bloomberg Intelligence, wrote Thursday. “The risk is that reduced Bakken activity may curb midstream volume flow and fee revenue.”
The transaction is expected to be completed early in the third quarter, Hess said. The company said it will continue with plans for an initial public offering of units in Hess Midstream Partners LP.