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Sandell Pushes Harder for DCP Changes Amid Midstream Dealing

Recent deals in the midstream master limited partnership (MLP) arena have moved activist shareholder Sandell Asset Management to press harder for a new strategy for DCP Midstream LLC (DCP) that he recently proposed.

Earlier this month, CEO Thomas E. Sandell wrote to the board of directors of DCP, which is a joint venture of Spectra Energy Corp. (SE) and Phillips 66 (PSX). Sandell is a significant shareholder in SE and PSX and thinks DCP would be a better fit with PSX than with SE.

"...[W]e believe that DCP's assets are more naturally aligned with PSX," Sandell said in the letter. "Furthermore, under PSX, DCP would be more integrated strategically with its partners and therefore more likely to derive more operational synergies and exhibit better earnings stability and growth.

"...Furthermore, it is no secret that DCP does not strategically integrate well into SE's other operations -- the majority of which are regulated, utility-like and fixed-fee paying."

On Monday, Sandell cited recent midstream sector transactions as further evidence that change at DCP is needed. "Strategic actions by Oneok Inc. [see Daily GPI, July 26], Devon Energy Corp./Crosstex Energy Inc. [see Shale Daily, Oct. 21], CenterPoint Energy Inc./OGE Energy Corp. [see Daily GPI, March 18], Enbridge Energy Partners LP, Cheniere Energy Inc., and Plains GP Holdings LP [see Daily GPI, Oct. 17] have all showcased the flexibility and strength of the MLP structure," he said.

Sandell has been calling for changes with DCP and with Spectra Energy's Westcoast Energy Inc. since earlier this year (see Daily GPI, June 13). On Monday he said there is up to $5/share of additional value in DCP Midstream to be unlocked for SE shareholders.

"Of note, one option presented involves a transaction between DCP and PSXP [Phillips 66 Partners LP] that has several similarities to the recent Devon/Crosstex transaction, which resulted in considerable value appreciation for all shareholders," Sandell said. "To this end, we are requesting that SE present a plan with respect to its DCP stake as quickly as possible, and note that several sell-side analysts have encouraged the company to do so as well."

Sandell also called again for an initial public offering (IPO) of the primary shares of SE's Westcoast, adding that recent analyst reports suggest that there is a "valuation disconnect" between the Canadian and U.S. assets of SE. Canadian and U.S. analysts differ in their valuation of Westcoast by $3.7 billion, or nearly $6/share, Sandell said.

"This clearly illustrates the significant 'home-bias' amongst sell-side analysts, which we believe would be eliminated if SE IPO'ed primary shares of Westcoast in the Canadian markets," he said. "We also believe that an IPO of Westcoast would position SE as a GP HoldCo entity targeting the most appropriate shareholder base."

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