Once-Rare Asset Sales by Pipeline Cos. Speed Up as Slump EnduresBy
Divestitures notable as players usually reluctant to sell
Energy Transfer, Kinder Morgan among those unloading networks
Energy infrastructure players are increasingly looking to sell prized assets amid a prolonged slump in commodity prices, something underscored by Energy Transfer Equity’s sale last week of a stake in its Midwest pipeline network.
In that deal, two of Energy Transfer’s subsidiaries agreed to sell for $2 billion more than one-third of their interest in an entity that controls two crude oil pipelines. Rivals Kinder Morgan Inc., Williams Cos., and TransCanada Corp. also are seeking to offload parts of their extensive networks of infrastructure for moving and storing oil and gas.
The divestitures are notable because pipeline players have historically been reluctant to sell assets -- their quirky ownership structures encourage them to bulk up, not whittle down. However, a more than two-year rout in oil prices, the worst downturn in a generation, has changed that calculus.
Pipeline companies “need to demonstrate cash-flow growth over time,” said Ali Akbar, managing director with Royal Bank of Canada’s RBC Capital Markets. Their assets “provide that growth arc.”
Investors plowed money into pipeline stocks before oil prices crashed last year, on the promise that they would keep growing, and keep doling out generous quarterly dividends.
The companies’ willingness to pare down illustrates how the oil rout has upended that bargain.
A lot of the larger pipeline companies “have have clearly hit a wall,” said Michael Kay, an analyst with Bloomberg Intelligence. “These guys always promise growth and that is part of the issue here.”
Kinder Morgan announced two asset sales this month. Valero Energy Corp. agreed to acquire its interest in a Gulf Coast pipeline, and Southern Co. agreed to buy the company’s 50 percent stake in another big pipeline in that region for about $1.47 billion.
The Houston-based energy giant indicated that more deals could be on the horizon as it seeks to pay down debt, as well as raise capital for high-priority construction projects.
“It’s safe to say that we would look at and evaluate, if we could and make it work, just about anything on our backlog that is separable that we can extract good value for,” Chief Executive Officer Steven Kean said in an earnings call with analysts in July, according to a transcript compiled by Bloomberg.
On Monday, Williams said it agreed to sell its Canadian operations to Inter Pipeline Ltd. for C$1.35 billion ($1 billion) to shrink debt. Others that have sold assets this year or announced plans to include Spectra Energy Corp., Crestwood Equity Partners, TransCanada and Plains All American Pipeline LP.
TransCanada is also selling assets -- including as much as 49 percent of its five natural gas pipelines in Mexico -- to help pay for its $10.2 billion purchase of Columbia Pipeline Group Inc.
Asset sales and joint venture deals are among several turnaround options being pursued right now across what’s called the midstream sector, the industry term for companies that offer various services for handling oil and gas between the well-head and refining process.
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They have also been cutting dividends, simplifying their business structures by consolidating affiliates, lowering capital-spending budgets, and raising capital by selling preferred stock that converts to common equity over time.
“They are steps to do the same thing,” said Kay of Bloomberg Intelligence. “Lower cost of equity, generate liquidity and manage debt.”
Selling all of an asset or a stake in an asset to help fund a construction project tends to be an option of last resort. Pipeline executives would prefer to keep their asset bases intact and raise capital through other means, such as a preferred share sale, according to Hugh Babowal, a managing director with Wells Fargo & Co. that advises on midstream deals.
Some of the companies pursuing asset sales have already tapped those other options or lack the ability to raise capital at an attractive price. Selling a stake in a pipeline project to a new joint venture partner is also a sensible way for a company to raise cash while keep operating control of the asset, he said.
“A lot of deals are what we would call ‘balance-sheet-repair’ deals,” he said. “Will you continue to see those deals? Yes.”
The assets that pipeline players are bringing to market tend to have several attributes that make them attractive to buyers, according to Akbar of RBC, including long-term customer contracts, strong cash flow, and minimal capital expenditure requirements.
Many of them “own valuable, cash-generating assets, which are the envy of buyers in the space,” he said. “Those assets regularly get bid up in auctions.”