Enbridge May Have Touched Off a ‘Supermajor’ Race for Pipes

Lloyd: Enbridge a Short Candidate Despite Record Deal
  • Operators need to be “bigger, faster, stronger”: analyst
  • Year’s biggest pipeline deal follows rout in energy prices

Is the North American pipeline sector about to be consumed by merger mania?

With Enbridge Inc. planning a $28 billion takeover of Spectra Energy Corp., some investors say the industry’s in store for more deals as pressure mounts on the likes of Enterprise Products Partners LP and Kinder Morgan Inc. to follow suit. The biggest pipeline deal of the year foreshadows a feeding frenzy as those companies that survived the collapse in oil and natural gas prices step up the hunt for bargains. TransCanada Corp. got the ball rolling with the $10.2 billion purchase of Columbia Pipeline Group Inc. earlier in the year.

“We’ve just come through a very tumultuous period,” said Libby Toudouze, a partner and portfolio manager at Cushing Asset Management in Dallas. “Being able to survive the trough in the energy cycle, especially one like this last one that was so long, means you have to be bigger, faster, stronger.”

Enbridge’s deal would vault the Calgary-based company into North America’s largest energy pipeline and storage player. It could also mark the beginning of the "supermajor" era for the industry, according to Rebecca Followill, head of research at U.S. Capital Advisors, since it might “light a fire in the bellies” of the larger pipeline players, setting off a wave of consolidation that could accelerate through the end of 2016.

“Enterprise Products Partners is the other big 800-pound gorilla out there,” Toudouze said. “This puts a little more pressure on them to try to do something in the space.”

A spokesman for Enterprise Products Partners didn’t immediately respond to an e-mail seeking comment. Kinder Morgan declined to comment.

‘Very Complementary’

If Enbridge closes the deal to buy Spectra, it’ll lord over a network of pipelines stretching from the oil sands of Alberta, Canada, to the coasts of southern Florida. It’ll be plugged into population centers from Seattle to Boston and from Houston to Montreal.

“This is two successful companies thinking they’ll be even more successful together,” said Skip Aylesworth, who oversees the Hennessy Gas Utility Fund. "This is a good deal for shareholders. If you look at the maps and overlay them, they’re very complementary.”

Spectra shares were up 2.2 percent to $41.91 at 12:18 p.m. in New York trading. Enbridge shares gained 2.1 percent to C$56.42 in Toronto.

TransCanada made a similar play after getting stymied on the Keystone XL pipeline. This spring, it bought Columbia Pipeline Group to create a network spanning from Canada to Mexico. Such deals may proliferate as opposition mounts against new projects across North America. Protesters in Montreal last week disrupted hearings on a proposed TransCanada line. Several arrests were also made at a site in North Dakota where Energy Transfer Partners LP is trying to build a line to Illinois.

‘Worth a Lot’

“This is the market adjusting to that kind of mentality,” said Jay Hatfield, chief executive officer of Infrastructure Capital Management LLC, a New York-based hedge fund. “Existing pipelines are worth a lot. Longhaul pipelines like Spectra has, particularly the natural gas pipelines, are worth probably 20 times Ebitda, not 15 times, which is what they’re trading at.”

Ebitda, a measure of income watched closely by some analysts and investors, is short for earnings before interest, taxes, depreciation and amortization.

Meanwhile, Enbridge is offering Spectra shareholders a 12 percent premium in the stock-for-stock deal. That’s in line with the 11 percent premium TransCanada offered for Columbia.

Energy Transfer Equity LP’s failed bid for Williams Cos. this year -- another effort to create a pipeline behemoth -- may put it at a disadvantage in this latest round of consolidation as it seeks to lower its debt level, according to Aylesworth. Williams, too, may find itself distracted by a looming proxy fight. Meantime, new players could emerge in the sector such as private-equity funds. “Kinder Morgan can play the game,” Aylesworth said. “I’d anticipate they might play around a little bit.”

Williams CEO Alan Armstrong said in an Aug. 1 interview that he’s focused on leading the company as a standalone entity. Energy Transfer’s Kelcy Warren said in an Aug. 12 interview that his company is “gearing back up” with an acquisition strategy and that the "doors are open" for possible deals.

“It’s a chess match, and I think you’re going to see some more players, more pieces in the action,” Aylesworth said. “As you piece this puzzle together, there will be little pieces missing, and somebody with those little pieces -- they become valuable.”

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