Enterprise Products Partners LP (EPD) has offered to buy Duncan Energy Partners LP (DEP), of which it already owns a majority, through a unit-for-unit exchange in a deal worth about $2.42 billion.
DEP units screamed higher Wednesday, adding nearly 24% to close at $40.32 after posting a new 52-week high of $40.71. EPD units closed down nearly 2% at $42.95.
EPD is offering 0.9545 of its common units for each outstanding publicly held DEP common unit as part of a transaction that would be structured as a merger of DEP and a wholly owned subsidiary of EPD. The proposal represents a value of $42.00/unit, or a premium of about 30%, based on the 10-day average closing price of DEP on Feb. 18.
"We believe this proposal should be attractive to Duncan Energy Partners investors who would participate in the future growth of Enterprise, which has a backlog of pending capital projects and a more diverse existing asset base," said EPD CEO Michael A. Creel. "In addition, public unitholders of Duncan Energy Partners would receive a substantial premium over the current trading price, a substantial distribution increase and a more liquid security."
EPD owns 100% of the general partner of DEP and owns about 58% of the outstanding common units of DEP, which gathers, transports, stores and markets natural gas and transports and stores NGLs and petrochemicals. Before its initial public offering (IPO) in early 2007 (see Daily GPI, Jan. 26, 2007), DEP's subsidiaries were owned by EPD. They remain part of EPD's midstream network.
In a note Wednesday morning Wells Fargo Securities LLC analyst Michale Blum said the deal was a matter of "when," not "if."
"...DEP was created and IPO'd by EPD in 2007 as an additional means for EPD to indirectly access the capital markets," Blum wrote. "At the time, the MLP [master limited partnership] capital markets were less robust and EPD was viewed as a 'serial' issuer of equity. At the IPO, DEP was positioned as an MLP with a higher yield and more mature fee-based assets, that were lower risk, but with more modest growth relative to EPD.
"However, DEP's Acadian pipeline system (intended to be a mature asset) ultimately had significant growth potential tied to shale development in the Haynesville [Shale]. As a result, EPD/DEP has undertaken a $1.5B expansion project, which created significant potential accretion for DEP. Ultimately, EPD's access to capital markets has improved due to (1) its leading NGL position, (2) its track record of unit price appreciation for unitholders, and (3) the increase in the depth and breadth of the equity markets."
Blum noted that in 2007 the total market cap of the MLP sector was $145 billion and total public equity and debt raised that year was $6.2 and $4.1 billion, respectively. Now the market cap of the MLP sector is $229 billion and the sector raised $13.1 billion and $20.3 billion of public equity and debt in 2010, respectively. "As a result, the primary reason for DEP's existence is no longer necessary," Blum wrote.
EPD is the largest publicly traded partnership and a large provider of midstream services for natural gas, natural gas liquids (NGL), crude oil, refined products and petrochemicals. Assets include 50,200 miles of onshore and offshore pipelines; 192 million bbl of storage capacity for NGLs, refined products and crude oil; and 27 Bcf of natural gas storage capacity.
DEP has about 9,400 miles of gas pipelines serving Texas and Louisiana. The partnership's Texas Intrastate System gathers and transports gas from supply basins in Texas to local distribution companies and electric generation and industrial and municipal consumers as well as to connections with intrastate and interstate pipelines. NGL assets of DEP include a product storage facility in Mont Belvieu, TX, and its South Texas NGL Pipeline System, which connect the Mont Belvieu storage complex to midstream infrastructure in South Texas.
"We received Enterprise's merger proposal and will begin our review process," said William A. Bruckmann III, chairman of the audit, conflicts and governance committee of the board of the general partner of Duncan Energy Partners.
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