Under pressure from an activist investor, Spectra Energy Corp. (SE) said last week it would drop down all of its remaining U.S. transmission and storage assets to Spectra Energy Partners (SEP) by the end of the year.
Sandell Asset Management Corp. has told Spectra management that it should consider strategic alternatives for Westcoast Energy Inc. and DCP Midstream LLC, including an initial public offering (IPO), and SE should also cut operating costs to increase shareholder returns, according to a Bloomberg report.
Asked about the report of pressure from Sandell, the company responded with a statement that said, in part, “We have been actively evaluating dropping our U.S. transmission and storage assets into our MLP for some time. This move is in line with our stated strategy of delivering sustainable value to shareholders by advancing more than $25 billion in growth projects through the end of the decade…
“We began this process last year by dropping down our NGL lines and then this year with our announcement to drop half of our crude lines to Spectra Energy Partners. Consistent with our commitment to enhance shareholder value, our Board and management team regularly evaluate strategic options to profitably grow the company.”
Investors and analysts were cheered by the accelerated dropdown plan. SE shares had spiked on Wednesday, the day after the announcement, by more than 11% to close at $33.68; SEP units gained nearly 6% to close at $39.29. On Friday, SE shares closed at $34.34; SEP units closed at $41.78. Several analysts raised their ratings on SE shares to “buy.”
Deutsche Bank, Morgan Stanley, and Tudor Pickering, Holt & Co. all upgraded SE, and BMO Capital said the move would lift SE shares by $2.00 over a base case scenario. U.S. Capital Advisors analysts Becca Followill and James Carreker raised their price target on SE by $3.00/share to $35 and their price target for SEP to $40.00/unit from $36 to reflect the impact of the dropdowns to SEP, they said in a note Wednesday. Their expectations are in line with those of Spectra management.
“We fully expect this move to be a win for investors in both SE and SEP, and it will give us a more robust MLP [master limited partnership] to advance our growth opportunities,” said SE CEO Greg Ebel. “By completing this dropdown, we expect to provide investors in Spectra Energy with higher dividend growth of approximately 12 cents a year versus our current commitment of 8 cents a year.
“Of equal importance, this transaction will provide Spectra Energy Partners’ investors with higher distribution growth by increasing its quarterly distribution rate to a penny a quarter versus the current three quarters of a cent.” Management plans to provide more details during its second quarter earnings call, which is scheduled for Aug. 6.
According to Followill and Carreker, pipeline assets remaining at SE include Texas Eastern Transmission (100%), Algonquin Gas Transmission (100%), Southeast Supply Header (50%), Maritimes & Northeast Pipeline (39%), as well as the nearly completed New Jersey-New York project. Storage assets at SE include Bobcat Storage (100%), Steckman Ridge (50%) and Market Hub Partners (50%).
“SE has historically pushed back on dropping the majority of its pipeline assets into an MLP,” the U.S. Capital analysts wrote. “More recently, their sentiment has changed, driven in large part by both a need for cash, and we think, a lagging stock price. With big capex [capital expenditures] anticipated for new pipes over the next several years [see NGI, Jan. 21], we think this big drop is a way to help with their cash needs.”
The analysts wrote that “the next logical step” for Spectra would be to drop down the rest of DCP Midstream (a joint venture with Phillips 66) to DCP Midstream Partners LP (DPM). “With the spin-off of Phillips 66 from [ConocoPhillips] and pending IPO of their own MLP, we think the next logical step is the dropdown of the remaining $7 billion of DCP Midstream assets into DPM.”
Ebel had been talking up the dropdown last Tuesday with CNBC’s Jim Cramer, saying it would make SEP “one of the largest MLPs in the United States.”
MLP action has been picking up of late. Enbridge Energy Partners LP on Friday launched an initial public offering of Midcoast Energy Partners LP (see related story). Earlier this month Devon Energy Corp. said it was reviving plans to form a midstream MLP (see NGI, June 10). CenterPoint Energy Inc., OGE Energy Corp. and ArcLight Capital Partners in March announced a midstream MLP would start off with 8,400 miles of interstate and 2,300 miles of intrastate pipelines (see NGI, March 18). And last February the $4.3 billion tie-up of Linn Energy LLC and its LinnCo LLC unit with Berry Petroleum Co. was said to be the first-ever acquisition of a C-corporation by an upstream limited liability company or MLP (see NGI, Feb. 25).
In testimony given in April to the Energy Tax Reform Working Group of the U.S. House Committee on Ways and Means, the trade group National Association of Publicly Traded Partnerships (NAPTP) highlighted the importance of the MLP structure to the energy sector. “At the end of March, the total market capital of MLPs was about $445 billion, of which just under $400 billion was in the natural resource sector,” NAPTP said. “Not counting acquisitions, MLPs raised over $23 billion in equity capital during 2012…[A] large part of this equity capital is devoted to expanding the nation’s domestic energy infrastructure.”
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