Among assets slated to be sold by Kinder Morgan Inc. (KMI) to win antitrust clearance for its acquisition of El Paso Energy Corp., the "only meaningful" buys are the 50% stake in the Rockies Express Pipeline (REX) and KMI's Kinder Morgan Interstate Gas Transmission (KMIGT), an industry analyst said Friday. And it's not because of what they are now, but what they could become.
"...[W]e believe the potential value of REX as a Marcellus [Shale] pipeline and the potential conversion of KMIGT to crude service will enable KMI to get a solid valuation for their pipes, even in today's challenging gas pipeline market," wrote Tudor, Pickering, Holt & Co.'s Bradley Olsen.
REX was developed to move Rockies gas eastward to markets. "REX has had a major impact on the Rockies gas market," wrote Olsen. "The pipeline was conceived as Rockies gas producers were realizing $1/Mcf pricing on their production and Chicago prices were nearly $8/Mcf."
However, the booming Marcellus Shale has dropped a gas balloon in the backyard of REX's intended market area, diminishing the value of the asset in the eyes of some, including credit rating agencies (see Daily GPI, March 16).
In a note Friday, U.S. Capital Advisors analysts Becca Followill and James Carreker said the quality of assets KMI is planning to sell varies widely. While in 2010 REX earned a paltry return on equity (ROE) of 3%, the Trailblazer Pipeline, which also is for sale, had a 70% ROE; and KMIGT was in the middle with 24% ROE.
ConocoPhillips holds a 25% stake in REX that it has previously tried to sell unsuccessfully. "However, we do not think Kinder would have offered a sale of REX as a concession to the FTC [Federal Trade Commission] unless they already had indications of interest for the asset," the U.S. Capital analysts wrote.
According to U.S. Capital, the three pipelines have a combined 2010 net earnings before interest, taxes, depreciation and amortization (EBITDA) of $400 million, a rate base of $3.5 billion and a weighted average ROE of 6.6%. Midstream processing and treating facilities also to be sold "are more rounding error," the analysts wrote.
In 2010 throughput on the three pipelines was 911 MMcf/d. The sale of the three pipes would reduce KMI's Rockies market share to about 38% from 52%, a 14% reduction, U.S. Capital said. Combined, the pipes could be worth $3.4 billion, assigning an EBITDA multiple of 12x to KMIGT and Trailblazer and 7x to REX. The midstream assets could fetch $200-300 million.
According to U.S. Capital, potential buyers include CenterPoint Energy Inc., TransCanada Corp., Spectra Energy Partners LP, Questar Corp., Xcel Energy Inc., Williams and Boardwalk Pipeline Partners LP.
According to Olsen, the Marcellus is turning out to be a glass-half-full story for REX.
"REX is now hauling substantial amounts of Marcellus gas westbound toward Chicago through an interconnect with Spectra's TETCO [Texas Eastern Transmission Co.] system, which lies across the western portion of the Marcellus," Olsen wrote. And he noted that the end of the REX pipe lies above the Utica Shale, where upstream activity is quickly gathering pace.
"While REX's future as an eastbound Rockies pipeline was in doubt as recently as one to two years ago, Marcellus growth and the emergence of the Utica provide higher certainty that gas volumes will continue to flow after the expiration of the original 10-year contracts that initiated with pipe completion in 2009," Olsen wrote.
Turning to KMIGT, Olsen would change the "G" to a "C" for crude. The pipeline currently moves gas from the Rockies to the Midcontinent and has contracts with lifespans averaging over three years, Olsen said. While the pipeline has "substantial short-term capacity commitments" to move gas, conversion of KMIGT to crude service could create value beyond the life of the gas contracts, Olsen said.
This is particularly true in today's energy patch with is focus on oil, thanks to gas prices that have been beaten down by shale plays like the Marcellus.
"Stretching from central Wyoming through Kansas and Nebraska, KMIGT sits on top of the Wattenberg (the location of the most productive horizontal Niobrara wells) and extends down into the Mississippi Lime in western and central Kansas," Olsen wrote. "With potential for a connection with [KMI's Express and Platte crude pipeline systems] out of Canada, and a proposed connection into Cushing [OK], this pipeline will be marketed to fetch bids that reflect value for potential conversion to crude service in a vital and growing onshore crude production region."
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