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Kinder Buying Harold Hamm's Bakken Pipes in $3B Deal

Kinder Morgan Inc. (KMI) agreed to pay about $3 billion, including about $1 billion of assumed debt, for Hiland Partners, which has crude oil gathering and transportation pipelines, and natural gas gathering and processing systems, primarily serving the Bakken Shale in North Dakota and Montana.

The seller is Harold Hamm and certain Hamm family trusts. Hamm was a pioneer in the Bakken Shale and is the founder of leading Bakken producer Continental Resources Inc. The Continental CEO recently wrote his ex-wife a nearly $1 billion check as part of their divorce settlement (see Shale DailyJan. 9).

"Hiland's systems serve some of the Bakken's largest and most successful producers, including Continental," said KMI CEO Richard Kinder. The acquisition marks KMI’s Bakken Shale entry.

The deal creates a "premier" midstream platform for KMI in the Bakken with a significant amount of acreage dedicated under long-term gathering agreements, KMI said. The assets have mostly fee-based contracts. "These acreage dedications are with some of the Bakken’s largest and most successful producers, covering some of the most attractive and economically viable areas in the basin," KMI said.

Hiland customers include Continental, Oasis Petroleum Inc., XTO Energy Inc., Whiting Petroleum Corp. and Hess Corp.

Hiland's crude oil gathering systems in North Dakota and Montana consist of 1,225 miles of gathering pipelines that deliver crude oil to the basin's major takeaway pipelines and rail terminals. At closing, the systems will have more than 1.8 million acres dedicated under long-term, fee-based agreements with major Bakken oil producers, according to KMI.

Hiland's largest oil gathering dedication will be with Continental, which has dedicated the majority of its Bakken acreage to the gathering systems under a long-term agreement, including "substantial" acreage in McKenzie, Mountrail and Williams counties in North Dakota.

The 485-mile Double H Pipeline, now under construction, will transport crude oil from Hiland's Dore Terminal in North Dakota to Guernsey, WY, where Double H interconnects with Pony Express Pipeline for further transportation to Cushing, OK. Double H Pipeline is in the final stages of construction and is expected to begin service by the end of the month with an initial capacity of 84,000 b/d. Expansion to 108,000 b/d is expected in 2016. The pipeline has firm take-or-pay contracts for about 60,000 b/d and is holding an open season for additional commitments.

Hiland's gas gathering and processing systems in North Dakota and Montana consist of 1,800 miles of gathering pipelines and, upon completion of a plant expansion in 2015, 240 MMcf/d of gas processing capacity and 30,000 b/d of fractionation capacity. The systems process associated gas from oil production and have 3.7 million acres dedicated under long-term agreements with major Bakken oil producers. Hiland's Midcontinent systems gather and process gas in the Woodford Shale and other areas of Oklahoma.

KMI said it expects that the multiple of earnings before interest, taxes, depreciation and amortization paid for Hiland, including future growth capital investments, will decline to about 10 times by 2018. The acquisition is expected to be modestly accretive to KMI's cash available to pay dividends in 2015 and 2016 and 6-7 cents accretive beginning in 2017.

"Kinder Morgan's projections for Hiland are reflective of the current commodity price environment," CEO Kinder said. "While Hiland's gathering systems serve some of the Bakken's and North America's most economic acreage, the projections incorporate announced reductions in drilling activity by Hiland's customers. Although Hiland's cash flow is largely fee-based, our projections are based on commodity prices consistent with the current forward curve for the portion that is sensitive to commodity prices."

During a fourth quarter earnings conference call Wednesday, KMI's Dax Sanders, vice president of corporate development, said the entry into the Bakken gives KMI a presence in all of the country's major producing basins.

CEO Kinder said the acreage under dedication to the Hiland systems is in the sweet spot of the Bakken and represents one of the top two producing areas in terms of breakeven prices for oil production. It's "not nearly as bleak" in this patch of the Bakken as it is in some of the country's other oil plays.

Kinder said the company aims to do with the Bakken assets something like what it did in the Eagle Ford Shale with the Kinder Morgan Crude and Condensate Pipeline. KMI plans to expand the Bakken systems through acquisitions and extensions. It's a long-term strategy for oil that's not too worried about currently depressed prices for crude, Kinder told analysts during the conference call.

"We think and believe that we are right in the Tier 1 sweet spot of the Bakken. Otherwise we wouldn't have done the deal," Kinder said.

KMI said it expects to retain nearly all of Hiland’s employees, which number close to 430. Closing is expected by the end of March.

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