Onshore explorer Petrohawk Energy Corp. on Tuesday agreed to sell a half interest in its Haynesville Shale gathering and processing business in northwest Louisiana to Kinder Morgan Energy Partners LP (KMP) for $875 million in a transaction that would create the largest Haynesville gathering and midstream business.
The joint venture (JV), to be named KinderHawk Field Services LLC, would share profits in more than 170 miles of pipeline now in service, which would increase to about 375 miles of pipeline with projected throughput of more than 800 MMcf/d by the end of the year.
By 2014 the JV is expected to have about 2 Bcf/d of mainline throughput capacity, which would make it one of the largest gathering and treating systems in the United States, said KMP CEO Rich Kinder. Additionally, the system's amine treating plants have a projected capacity by year's end of about 2,635 gallons/minute.
KinderHawk is expected to have an enterprise value of up to $1.75 billion at inception. The transaction also builds KMP's presence in U.S. shale plays, said the CEO.
"Look at our overall exposure to the shales right now," Kinder told analysts during a conference call to discuss the transaction. KMP now has pipeline access in several of the biggest shale plays in the United States, including the Barnett and Eagle Ford shales in Texas and the Fayetteville Shale in Arkansas.
"That's what this acquisition is all about," he said.
Petrohawk is a "strong" exploration and production (E&P) operator "with superb fee-based gathering and treating assets in the Haynesville Shale," said Kinder. "We anticipate this joint venture will generate substantial future growth opportunities as additional development continues in the Haynesville Shale both from Petrohawk and third-party producers."
Petrohawk would operate the business during a short transition period, which could take up to six months, after which the newly formed KinderHawk would assume operations. The JV has received a life of lease dedication to transport and treat all of Petrohawk's operated Haynesville and Bossier Shale production in Louisiana at agreed-upon rates, as well as minimum volume commitments from Petrohawk for the first five years.
KinderHawk, which would be staffed by both companies, also is to focus on providing firm service to third-party shippers.
The transaction, which is set to be completed by the end of May, is expected to be accretive to cash available to KMP unitholders beginning in 2011. KMP's general partner agreed not to take incentive distributions related to this transaction through the end of 2011.
This year Petrohawk has reached agreements or closed on $1.4 billion in property sales to help boost its liquidity. The Houston-based E&P has been selling off assets to focus on its growing shale prospects. Separately, Petrohawk said it would shift capital to its Eagle Ford efforts in South Texas to increase oil and condensate production because of weak natural gas prices. The E&P also plans to shift two of its Haynesville rigs to the Eagle Ford play.
"Right now they are operating 14 rigs, and that's what we're assuming," Kinder said. "They have to drill about 200 wells just to hold their lease over the next two years. We will certainly have a running start; production has ramped up very nicely so far..."
Petrohawk also plans to cut its 2010 capital spending plan by $100 million.
Petrohawk CEO Floyd C. Wilson said the KMP JV couples his company's E&P know-how with the pipeline partnership's expertise and "provides an exciting partnership at exactly the right time in our development of the Haynesville Shale."
During the conference call Kinder was asked whether he knew of other upstream players that may be looking for midstream operators as joint partners.
"That's purely speculation, but in the shale plays overall we see a lot of independent producers wanting to sell an interest in their assets because it allows them to put more money back into the ground on the E&P side," said Kinder. "We would not have made this acquisition had we simply been an investing partner with the producer controlling the asset. We weighed in as an equal voice on a going forward basis...We want all of it or at least enough to have an equal voice at the table."
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