Kinder Morgan Energy Partners LP (KMP) is buying Petrohawk Energy Corp.'s half of the companies' Haynesville Shale midstream joint venture, KinderHawk Field Services, and also acquiring a 25% interest in Petrohawk's gas gathering and treating business in the Eagle Ford Shale, the companies said.
KMP is paying $855 million and assuming $65 million in debt for the assets. KMP also said it will spend about $220 million to build a 300,000 b/d crude/condensate pipeline to initially transport 50,000 b/d of condensate for Petrohawk from its production area in the Eagle Ford to the Houston Ship Channel.
KMP CEO Richard Kinder noted that the midstream assets being acquired have fee-based contracts and, along with the new crude/condensate line, expand the partnership's footprint in the Haynesville and Eagle Ford.
"...[W]e expect opportunities in the prolific natural gas shales to be a primary driver of future growth at KMP," he said. "In addition to our natural gas business segment, which will benefit from the acquisition, our products pipelines segment will realize growth from the construction and operation of the new pipeline that will transport condensate and crude oil. We have executed a long-term anchor agreement with Petrohawk for 50,000 b/d of condensate, and this new pipeline offers the potential to ship significant incremental third-party volumes above that amount."
The returns expected by KMP from the second half of KinderHawk will be "well in excess of our cost of capital," said Kinder, who is bullish on the Haynesville and the associated Bossier formation.
"We've taken into account all of the relevant information, including the reduction in rigs at Petrohawk as stated in their release this morning..." Kinder said during a conference call Thursday to discuss the deal. "They also revealed increased production both for the first quarter and raised their outlook for the full year because of better volumes in both the Haynesville and the Eagle Ford than expected. So again, I think we're seeing the kind of production that we need to make these gathering systems really hum for us.
"We have used very conservative assumptions in terms of throughput on the Haynesville."
While some in the industry have been "negative on the Haynesville" during the sprint to produce liquids-rich gas, "I would just say it's still a huge producing basin..." Kinder said. "Production is now about 5.5 Bcf/d after really just a couple years of development. Just by contrast...it took the Barnett Shale a decade to pass 5 Bcf [per day]." Adding in the Bossier, "they're going to be producing big volumes of gas up there for 30 years or more, and that's the kind of production that will feed our gathering system over the years to come."
Wells Fargo Securities analyst Michael Blum and his team said they view the KinderHawk deal as "a positive" for KMP and Kinder Morgan Inc. "The partnership is paying roughly $150-200 million less for the remaining 50% interest in KinderHawk than its original purchase, reflecting the recent slowdown of drilling activity in the region..."
After closing, which is expected in the third quarter, KMP will own all of KinderHawk, the largest gas gathering and midstream business in the Haynesville Shale. KinderHawk has more than 400 miles of pipeline with more than 2 Bcf/d of pipeline capacity and throughput of more than 0.9 Bcf/d. Throughput is expected to reach 1.2 Bcf/d by year-end.
It was just over a year ago that Petrohawk agreed to sell a half interest in its Haynesville gathering and processing business to KMP for $875 million, creating KinderHawk (see Daily GPI, April 14, 2010).
In the Eagle Ford Shale in South Texas, KMP and Petrohawk will form a joint venture (KMP will own 25% and Petrohawk 75%) that will own two midstream gathering systems in and around Petrohawk's Hawkville and Black Hawk fields. The joint venture, which will have a life of lease dedication of Petrohawk's reserves, will provide Petrohawk and other area producers with gas and condensate gathering, treating and condensate stabilization services. Assets will consist of more than 280 miles of gathering pipelines and about 112 miles of condensate gathering lines to be in service by year-end. KMP has a presence in the Eagle Ford through existing assets and a joint venture with Copano Energy LLC, which provides gathering, transportation, processing and fractionation services.
KMP's crude/condensate pipeline will consist of about 61 miles of new-build construction and 109 miles of existing gas pipeline that is being converted. Service to KMP's gas customers in the Houston Ship Channel will not be affected by the optimization of the company's Texas intrastate system. The pipeline will originate in Petrohawk's Black Hawk Field near Cuero, TX, and extend to the Houston Ship Channel where it will initially deliver condensate to multiple terminaling facilities with access to local refineries, petrochemical plants and docks. The pipeline is expected to be in service in the second quarter of 2012.
"We believe the crude/condensate pipeline will be very attractive to other Eagle Ford producers who are looking to get their products into the marketplace," Kinder said. "We are in the advanced stage of discussions with other producers, which are expected to result in substantial additional throughput agreements in the future."
Standard & Poor's Ratings Services said KMP's credit ratings were not affected by the planned transaction.