Producers have eschewed dry gas in favor of more lucrative oil and liquids-rich production, and midstream operators are following them. Energy Transfer Partners LP (ETP) is buying Sunoco Inc. for $5.3 billion in a deal intended give it oil and liquids business and a presence in the Marcellus Shale.
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, natural gas liquids (NGL) and refined products, the companies said Monday.
"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."
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 Monday. "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 Shale Daily, June 17, 2011).
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.
"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," Warner said.
ETP has pipeline 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. It currently has natural gas operations that include 23,500 miles of gathering and transportation pipelines, treating and processing assets, and three storage facilities in Texas. ETP also holds a 70% interest in Lone Star NGL, a joint venture that owns and operates NGL storage, fractionation and transportation assets in Texas, Louisiana and Mississippi.
Besides owning the general partner of ETP, ETE also owns the general partner of Regency Energy Partners LP. ETE as of March is the parent of Southern Union. The ETE family of companies owns 45,000 miles of natural gas and NGL pipelines.
Sunoco Inc. owns the general partner interest of Sunoco Logistics Partners LP, a master limited partnership that owns pipeline, terminaling and crude oil acquisition and marketing assets.
Sunoco Logistics 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. Its terminal facilities consist of 42 million shell barrels of refined products and crude oil capacity (including 22 million shell barrels of capacity at the Nederland Terminal on the Gulf Coast of Texas and approximately 5 million shell barrels at the Eagle Point terminal on the banks of the Delaware River in New Jersey). The crude oil acquisition and marketing business is principally conducted in Oklahoma and Texas and consists of about 190 crude oil transport trucks and 120 crude oil truck unloading facilities.
Sunoco Logistics and MarkWest Liberty Midstream & Resources LLC last year announced the Mariner West project, which would carry Marcellus Shale ethane from Pennsylvania to Canadian markets.
Midstream peer company Enterprise Products Partners has been focused on growing its business on the back of increasing NGL production (particularly ethane) from the nation's shale plays (see Shale Daily, March 21). Enterprise and two partners recently announced plans to construct an NGL pipeline from the Denver-Julesburg Basin in Weld County, CO, to Skellytown, TX. Enterprise is also behind the proposed 125,000 b/d Appalachia-to-Texas (Atex Express) ethane pipeline.
The ETP-Sunoco merger consideration, which consists of $25 in cash and 0.5245 of an ETP common unit, or approximately 50% cash and 50% ETP common units, represents a 29% premium to the 20-day average closing price of Sunoco shares as of April 27. By acquiring Sunoco, ETP will also own Sunoco's general partner interest and the incentive distribution rights (IDR) in Sunoco Logistics Partners as well as Sunoco's 32.4% interest in Sunoco Logistics Partners' limited partner units and Sunoco's branded retail business with about 4,900 retail locations in the United States.
Sunoco shareholders can elect to receive, for each Sunoco common share they own, either $50.00 in cash, 1.0490 ETP common units or a combination of $25.00 in cash and 0.5245 ETP common units. The aggregate cash paid and common units issued will be capped so that the cash and common units will each represent 50% of the aggregate consideration. Upon closing, Sunoco shareholders are expected to own 20% of ETP common units. In addition, $965 million of Sunoco's existing notes will remain outstanding.
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.
The deal has been approved by each company's board of directors and is expected to close in the third or fourth quarter, subject to approval of Sunoco shareholders and regulatory approvals. Following the closing, Sunoco and Sunoco Logistics Partners will operate under the ETE umbrella of companies. By acquiring Sunoco, ETP will own Sunoco's general partner interest, limited partner interest and the incentive distribution rights in Sunoco Logistics Partners. Sunoco Logistics Partners will continue to be traded on the New York Stock Exchange as a separate publicly traded MLP.