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Williams Moves to Master Marcellus

Williams, which has been laser focused on building a midstream stronghold in the Marcellus Shale, last week added to its arsenal after agreeing to pay $2.5 billion to buy the midstream arm of privately held producer Caiman Energy.

The deal by Williams Partners LP (WPX) "fills one of the few holes" in a "formidable midstream portfolio" as they "move to become master of the Marcellus," said energy analyst Bradley Olsen of Tudor, Pickering, Holt & Co. (TPH).

Williams (WMB) owns 72% of WPX. Caiman Energy's private equity investors include EnCap Flatrock Midstream, EnCap Investments LP and Highstar Capital.

During a conference call to discuss the transaction, WMB CEO Alan Armstrong said management had "made it very clear with folks all along that we wanted to be the No. 1, No. 2 player in the Marcellus basin, and this moves us in that direction...Our sights are set higher [than only from gains on the Caiman acquisition] but it provides a great platform for that."

Caiman Eastern Midstream LLC's independent business gathers natural gas liquids (NGL) from the Marcellus Shale in northern West Virginia, southwestern Pennsylvania and eastern Ohio. The business includes two processing facilities and a fractionator. Expansions to the gathering system, processing facilities and fractionator are currently under construction; a 50-mile ethane pipeline also is planned. The assets are tethered by long-term contracted commitments on 236,000 acres from 10 producers. Additional firm processing commitments total 100 MMcf/d.

According to Armstrong, the area "provides vast opportunity for growth," with an estimated 300 Tcfe in place within a 35-mile radius. Most of the acreage "in periphery of the assets is not yet dedicated, which represents a growth opportunity. In core areas where assets are in service, acreage dedications are strong -- 50% in Marshall County [WV]; 30% in Wetzel County [WV], [and we are] expecting continued growth."

By 2020 the Caiman gathering volumes are expected to hit 2 Bcf/d-plus, with 300,000 b/d of NGLs and condensate. The properties' capital costs are estimated at about $1.34 billion in 2012-2014, with "significantly less" from 2015-2020, said Armstrong.

"Across all of the Marcellus, we expect to gather 5 Bcf/d by 2015," he said. "We're putting together the kind of infrastructure that makes drilling in the Marcellus even more desirable for producers because we provide large-scale infrastructure solutions that connect producers' natural gas and natural gas liquids to the best markets."

The Oklahoma City-based companies have several proposed pipeline and infrastructure expansions under way in the region including the Atlantic Access project on Transco, to help carry more than 1 Bcf/d of Appalachian gas supply to eastern markets by late 2014 (see (NGI, Jan. 2); the Leidy expansion on Transcontinental Gas Pipe Line (Transco), which is part of the MARC I Hub Line in Pennsylvania (see NGI, Aug. 16, 2010); and Confluence, a rich gas project still in the planning stages (see NGI, Sept. 26, 2011).

"This area is one that we continually study," said Armstrong. "It is one of the best locations to be in, with basins we want to enter. This is absolutely the best, we think, in the United States, from a gas drilling location..." Estimated ultimate reserves from wells are about 4.5-7.5 Bcf and 13 MMBtu, he said.

"Drilling netbacks, which are key, today even at lower [natural gas] prices and without an ethane advantage, get us about $5.70 at $2.30 gas, and that is without an uplift from ethane...This is going to be a very large-scale system for us. We are only focused on being a large-scale infrastructure provider. Processing capacity by the end of 2013 in this area will be 1 Bcf/d. Fractionation by the end of 2013 will be almost 73,000 b/d, with 30,000-45,000 b/d of ethane capacity..."

The region is "positioned to attract new NGLs in the area. It's going to be the place for producers to bring gas for takeaway as well, and it's positioned next to the Utica [shale]. It does include two river crossings, as well..." If the company were only to capture the "opportunities from the Caiman acquisition, we'd be disappointed. We'll be able to grow well beyond that."

The partnership also has designs on teaming up with Caiman Energy to develop midstream infrastructure in the Utica Shale, primarily in Ohio and northwest Pennsylvania. The proposed Utica Shale joint venture is still in development stages so few details were provided. However, Armstrong said the alliance should become a formidable business to serve a growing number of producers.

Caiman Energy CEO Jack Lafield said, "When you combine our management team and the expertise of both our companies in gas gathering, processing and NGLs, with our shared commitment to community and customer-focused solutions, it's clear that Caiman and Williams are a powerful team."

The acquisition is to be funded by the partnership with $1.78 billion in cash and 11.8 million common units that are valued at about $720 million. The cash portion would be funded by a combination of equity, debt and available cash. To help with the transaction, WMB is investing another $1 billion in its pipeline unit and buy 16.3 million units. The acquisition, expected to be completed by the end of June, is subject to customary regulatory filings and approvals.

TPH's Olsen and his team said they were impressed "with the way that WPZ only enters an area if they believe they can dominate and drive economies of scale.

"Since buying into a gathering joint in southwestern Pennsylvania in 2009, WPZ has made its Marcellus beachhead into a dominant competitive position with more than 3 Bcf/d of dry gathering capacity by 2015, delivering into the four largest Marcellus takeaway pipes," Transco, Tennessee Gas Pipeline Co., Texas Eastern Transmission Co. and Millennium Pipeline.

"With [the] acquisition, not only does WPZ expand that potential capacity to 5 Bcf/d by 2015 (1.5 Bcf/d from Caiman), but also enters the liquids-rich western portion of the Marcellus, which had until now been a missing piece in the Williams Marcellus strategy. In addition to the financial benefits, the Caiman acquisition provides WPZ with a potential foothold in the Utica, immediately increases the likelihood of more than $2 billion of proposed projects, and increases the value of WPZ's existing Transco asset as a Marcellus takeaway pipeline."

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