Inter Pipeline Makes $1 Billion Bet on Rally in Williams Deal

  • Purchase includes liquids extraction, fractionator, pipelines
  • Inter Pipeline to continue Williams’ plastics plant proposal

Inter Pipeline Ltd. has agreed to acquire the Canadian assets of Williams Cos. for C$1.35 billion ($1 billion), betting that a rebound in commodity prices will justify the expansion of its natural-gas liquids business.

The purchase includes extraction and processing facilities in the oil sands in Alberta, as well as about 260 miles (418 kilometers) of pipelines from Williams and its master-limited partnership unit, Williams Partners LP, the companies said in statements on Monday. Williams and Williams Partners said they plan to use the cash proceeds to shrink debt.

The deal adds to the existing NGL operations of Calgary-based Inter Pipeline and opens up a potential new line of business, as the company will assume a petrochemical complex proposal in Alberta. Inter Pipeline is also getting the assets for less than the roughly C$2.5 billion Williams spent on building them out over 16 years and at a discount to their value of $1.2 billion in 2014, when Williams transferred them to Williams Partners.

“What they’re hoping is that they’re buying something at the bottom of the market,” and boosting commodity exposure, Laura Lau, a senior vice president and senior portfolio manager at Brompton Group in Toronto, said in a phone interview. “It gives them more torque to oil prices if they should rise.”

Slower Growth

Inter Pipeline, which also has crude pipelines and bulk liquid storage terminals in Western Canada, is facing slower production growth in the oil sands that has raised concerns from investors about smaller volumes on its systems. Making an acquisition now, two years into the oil market downturn, is good timing amid expectations that a glut is easing, Lau said.

The assets in Alberta include two liquids extraction plants near Fort McMurray, a fractionator near Redwater and a pipeline system connecting the facilities. The extraction plants can recover about 40,000 barrels a day of liquids and olefins from off-gas, a byproduct of upgrading bitumen into synthetic crude oil. The fractionator further processes the liquids into other products, including propane and butane.

In a statement, Inter Pipeline Chief Executive Officer Christian Bayle called the deal “highly complementary” to the existing NGL business and said it positions the company to “significantly benefit” from rising energy prices. Inter Pipeline is doing a C$600 million equity offering to help finance the acquisition.

Failed Deal

Williams put its Canadian business up for sale after a proposed $32.9 billion takeover of the company by Dallas-based Energy Transfer Equity LP fell apart in June as the slide in oil prices threw into question the economics of the deal. Williams stayed committed to selling the Canadian division as it focuses on reducing exposure to commodity prices in favor of relying more heavily on fee-based revenue from transporting natural gas.

“While it’s a great asset and very well positioned competitively, it doesn’t fit our strategy all that well,” Williams Chief Executive Officer Alan Armstrong said in an Aug. 1 interview.

The Tulsa, Oklahoma, pipeline company last week cut its dividend by 69 percent and said it would instead invest about $1.7 billion in its Williams Partners unit to help pay for “growth projects.” 

Williams has agreed to waive $150 million worth of incentive distribution rights as part of the Canadian business sale. The rights are extra payments that master-limited partnerships make to their controlling entities. That will help Williams Partners bolster its balance sheet to avoid reducing its dividend, said Michael Kay, an analyst at Bloomberg Intelligence in New York.

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