Energy Transfer Partners LP's (ETP) latest acquisition is intended to grow the partnership's pipeline footprint, not in natural gas but in the far more lucrative crude oil and natural gas liquids (NGL). The focus on oil and liquids is a sign of the times as ETP intends to convert some gas pipelines to crude oil service. It's not the only midstream player planning to re-purpose gas pipelines, a consultant pointed last week, suggesting that there are more conversions to come.
ETP is buying Philadelphia-based Sunoco Inc. for $5.3 billion in a deal that also gives it Marcellus and Utica shale region. The combined company would be one of the largest and most diversified energy partnerships in the country through expansion of ETP's geographic footprint and strengthening of its presence in the transportation, terminaling and logistics of crude oil, NGLs and refined products, the companies said last week.
"This transaction, which will be immediately accretive, represents the next step in Energy Transfer Partners' transformation into a more diversified enterprise with an integrated and expanded footprint," said CEO Kelcy Warren. "As we have said in the past year, our goal is to derive more of our distributable cash flow from the transportation of heavier hydrocarbons like crude oil, NGLs, and refined products. With this transaction, we make a major move in that direction, bringing our cash flow mix related to the combined enterprise's pipeline businesses to approximately 70% natural gas and 30% heavier hydrocarbons. At the same time, we will enhance the size and scale of the ETP platform by creating new service capabilities and entering new geographic operating areas."
The natural gas price collapse has shrunk gas producer margins, and basis differentials have collapsed as well, a fact not lost on ETP. "...[W]e've got to get a healthier mix of the movement of crude with natural gas," Warren told financial analysts during a conference call to discuss the deal. "The primary reason for that is look at what's happened to basis differentials in natural gas...They're almost nonexistent. That's OK; they will return; they will come back. They always do. The margins for movement of crude now are good. We think they're going to be good for quite a while...We think this is the right thing for us to do."
The acquisition would add 107,000 b/d of NGL throughput to ETP's current NGL throughput of 576,000 b/d and also add 1 million bbl of NGL storage capacity to the 33 million bbl ETP currently has. On the crude side, ETP would gain 5,400 miles of crude oil pipelines, infrastructure that spans the Marcellus region of Ohio, Pennsylvania and beyond in the Northeast.
"ETP has an interest in growing its Marcellus Shale-related activity, and I am pleased that the combined enterprise will retain a strong Pennsylvania presence," said Sunoco CEO Brian P. MacDonald.
ETP is to acquire Sunoco in a unit and cash transaction valued at $50.13/share. The deal comes weeks after the closing of ETP general partner owner Energy Transfer Equity LP's (ETE) acquisition of Southern Union Co., which created a midstream company with more than 44,000 miles of interstate natural gas pipelines and an estimated 30.7 Bcf/d of transportation capacity (see NGI, April 2; July 25, 2011).
One year earlier a joint venture formed by ETP and Regency Energy Partners LP acquire LDH Energy Asset Holdings LLC from Louis Dreyfus Highbridge Energy LLC for $1.925 billion in cash (see NGI, March 28, 2011). "The most important thing...if you look at our customers, they're all moving to oily plays," Warren said at the time. "Everybody that has a choice to drill a gas well versus an oil well is drilling an oil well. Second to that, if you don't have a choice, then you're certainly trying to drill the [gas] wells that are more saturated with liquids."
Given the industry-wide shift to liquids and crude, ETP has been eyeing natural gas pipeline assets in its portfolio that could be converted to crude service, particularly some of the Southern Union assets, and Sunoco's expertise could help with that, Warren said. The Texoma pipeline in Texas, currently a gas pipeline but previously one that carried crude oil, is ripe for conversion back to oil service, Warren told analysts last week. Additionally, "there are...[natural gas] assets that were part of the Southern Union acquisition that are much more trunkline in nature; they span longer distances. They're not needed for the demand of our customers...So we are exploring converting [to crude oil service] some of those lines from the Gulf Coast to the Midwest, to other parts of the country," Warren said.
Consultant Rusty Braziel noted the deal last week in his RBN Energy blog and devoted three postings to examining the economics of pipeline conversions from natural gas to crude oil service. "If a gas pipeline can be converted to crude service, the economics look pretty good. Read -- really good," Braziel wrote. "That's the reason ETP is turning over rocks to find the best pipes to flip to crude. It is truly the season for pipeline conversions. The current flat natgas basis environment would tell us that there may be a few spare gas pipelines around." Braziel noted plans by Kinder Morgan to convert a 635-mile Wyoming to Missouri section of its former Pony Express Pipeline from natural gas back to its original function of carrying crude oil (see NGI, Aug. 8, 2011).
ETP has pipeline and midstream operations in Alabama, Arizona, Arkansas, Colorado, Florida, Louisiana, Mississippi, New Mexico, Utah and West Virginia, and owns what it claims is the largest intrastate pipeline system in Texas. Besides owning the general partner of ETP, ETE's family of companies owns 45,000 miles of natural gas and NGL pipelines.
Among other things Sunoco Inc. owns the general partner interest of Sunoco Logistics Partners LP, a master limited partnership that has 2,500 miles of refined products pipelines in the Northeast, Midwest and Southwest and equity interests in four refined products pipelines. It has 5,400 miles of crude oil pipelines mainly in Oklahoma and Texas and terminal facilities consist of 42 million shell barrels of refined products and crude oil capacity assets. Sunoco Logistics and MarkWest Liberty Midstream & Resources LLC last year launched the Mariner West project to carry Marcellus Shale ethane from Pennsylvania to Canadian markets.
Standard & Poor's Ratings Services (S&P) affirmed ETP's "BBB-" corporate credit rating and revised its outlook to "stable" from "negative," and placed the "BB+" corporate credit rating on Sunoco Inc. on CreditWatch with "positive" implications. The "BBB" corporate credit rating on Sunoco Logistics Partners was placed on CreditWatch with "negative" implications, and the "BB" corporate credit rating on ETE was affirmed and its "stable" outlook maintained. S&P said the deal would extend ETP's scale and enhance its position across the gas, oil and NGL value chain. "The contribution from ETP's challenged intrastate natural gas business will also notably decrease and be replaced by Sunoco's more stable crude oil and refined products transportation assets," the ratings agency said.
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