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Market for Gas Storage Assets Remains Strong

The number of players competing for natural gas storage assets is diverse and growing, and when new infrastructure is for sale, "at least a half dozen players" likely will be ready -- and able -- to bid, ensuring asset values will continue to rise, industry experts said Thursday.

RBC Capital Markets' Tim Watson, who is based in Houston as managing director of the firm's energy mergers and acquisitions, spoke at Platts 5th Annual Gas Storage Outlook conference. The value of storage is evidenced by the number of participants ready to make a deal. "A lot of different types of buyers and sellers" makes for "a lot of competition."

The growing group of master limited partnerships (MLP) has taken the lead in looking for storage, he said. Capitalized by their stable pipeline assets, MLPs consider storage a stable investment complement. Watson said they also want the assurance of having storage available for their pipes. He estimated more than 50 MLPs now operate in the United States, which is about double the number five years ago.

"Any pipeliners today may be interested in buying storage assets," said Watson. "MLPs are the dominant buyers...I call this the 21st Century MLP bull market." However, MLPs face increased competition for midstream assets from a growing cadre of investment bankers and private equity.

"The influence of financial sponsors is not to be underestimated," said Watson. "They have the money, and they are looking for investments. And utilities also are interested in storage because they need the physical gas" and can better manage price with storage.

One of the "more fascinating" transactions was EnCana Corp.'s sale last year of the AECO Hub in Alberta, Wild Goose Gas Storage Inc. in California, Salt Plains Gas Storage Inc. in Oklahoma and one facility in development, Starks Gas Storage LLC in Louisiana. EnCana eventually sold the assets to Carlyle/Riverstone subsidiary Niska Gas Storage for US$1.5 billion -- $500,000 more than it expected to receive, Watson said (see Daily GPI, May 16, 2006; June 21, 2005).

The group of bidders interested in obtaining EnCana's assets was diverse, he said, willing to negotiate and willing to pay a premium.

"It took eight months to put the deal together," he said. "There have been no comparable transactions of this size and few comparable transactions in North America. We ended up putting together a unique mix of business arrangements to accommodate the contracts and the optimization. Buyers today continue to see a shortage of supply space and storage space. The market conditions, combining gas prices and storage spreads, were the key process drivers" for the EnCana sale, but the "fundamentals are still there."

Watson noted there are "constrained opportunities" to secure midstream assets, matched with "an ongoing cycle of growing financial opportunities. I think the overall strong demand is going to continue. The multiples are strong, and there is continuing participation by all kinds of buyers...Increasingly, the market will have to deal with that."

Jim Bowe, a partner with Washington, DC-based Dewey Ballantine LLP, agreed. "There's a frenzied desire to get into the market. Some will be there every time," he said of the bidders. Bowe, who also handles acquisitions for energy clients, said, "I haven't seen any fall-off in the interest for storage assets."

Bowe thinks a big reason for the interest is that "a lot of money is looking for a home in hard assets. The amount of money available to hedge funds, for instance, is just enormous. And there's the MLP phenomenon. A lot of money is looking to invest in storage projects."

"At the end of the day, market fundamentals are the primary driver," said Niska's Rick Staples, vice president of marketing and optimization. "These assets are in all of the major supply basins. There may be reduced supply in the near term, but there is more supply coming when prices rise and costs drop."

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