Pipelines Prove Where The Real Action Is

by Aaron Levitt | December 13, 2012 10:17 am

While everyone in the oil patch focused their attention on Canada’s recent decision[1] to allow CNOOC’s (NYSE:CEO[2]) landmark $15 billion bid for Nexen (NYSE:NXY[3]) go through, the midstream industry was hard at work cooking up some of its own deals — and some pretty big ones at that.

As we’ve noted here at InvestorPlace before, beefing up our energy logistics infrastructure is of vital importance if we ever want to meet our full potential and reach the goal of energy independence[4]. Recent deals won’t just go a long way in helping meet that goal, but also go to show just how exciting — and profitable — the boring world of pipelines, storage tanks and gather systems can really be for investors.

Williams Leads The Way

When Chesapeake Energy (NYSE:CHK[5]) was in the real depths of its cash crunch back in June, one prized asset it was willing to let go was its vast network of pipelines[6] and natural gas storage facilities. The company sold its entire 45% interest in Chesapeake Midstream Partners[7] – now called Access Midstream Partners (NASDAQ:ACMP[8]) — to private equity firm Global Infrastructure Partners (GIP) for $2 billion. GIP purchased the entire general partner side of the business and 69% of the limited partner units after the deal.

After holding Access for a few months, GIP now seems willing to depart with a few of the assets. North America’s third-largest U.S. pipeline firm Williams (NYSE:WMB[9]) has agreed to acquire a 25% stake in the natural gas partnership, as well as a 50% interest in its general partner. Williams will pay roughly $2.4 billion[10] for the stake in Access.

While that may seem high, it’s actually a bargain once the benefits play out over the longer term.

See, the deal allows Williams to gain access to large-scale, already-built pipelines in some key producing regions like the Marcellus[11]. It’s a lot easier to build smaller gathering systems and connect them to a larger trunk line than to build the entire pipeline network from scratch.  While Access and Williams will continue to operate as separate companies, they have little overlap in their current operations and the ownership of the GP makes it easier for Williams to “partner up” and use Access’s lines.

Secondly, the deal gives Williams a stake in a second tax-free partnership; it already owns Williams Partners (NYSE:WPZ[12]). Access is structured as a master-limited partnership[13] (MLP), so it pays no federal income taxes as long as it pays out most of its cash to its shareholders … and Williams now owns 25% of the units. Likewise, Williams stake in Access’s general partner means it’s entitled to an increasing share of cash flow as Access grows. According to Bloomberg, Williams’ dividends have increased an average of 26% a-year over the past five years. WMB expects Access to begin benefiting its dividend growth starting in 2014.

More Big Deals

Williams wasn’t the only pipeline firm recently making big moves. Natural gas-focused Spectra Energy (NYSE:SE[14]) announced that it will spend $1.49 billion to buy the Express-Platte System[15] from the Ontario Teachers’ Pension Plan and Kinder Morgan Energy Partners (NYSE:KMP[16]). The system is only one of the three major pipelines that move crude oil from Western Canada to refineries in the Rocky Mountain and Midwest regions of United States.

It’s a transformative deal for Spectra as it gives the company a foothold in the rapidly expanding North American crude oil pipeline market and lowers its dependence on natural gas[17]. Spectra expects to add other oil and oil-products liens to its arsenal in the upcoming year, while the Express-Platte purchase will add 3 to 5 cents per share to annual earnings in 2013.

Not to be outdone, Tesoro Logistics Partners (NASDAQ:TLLP[18]) made a move to boost its presence in the Northwest as well by buying $400 million in assets from Chevron (NYSE:CVX[19]). Tesoro purchased the oil and gas giant’s Northwest Products System[20] consisting of the 760-mile Northwest Product Pipeline, a separate five-mile jet fuel pipeline to the Salt Lake City International Airport and various refined products terminals.

Overall, the purchase will capture operational synergies within Tesoro’s own existing terminals[21] in the region and will be immediately accretive to distributable cash flow per unit.

A Great Bet

So there you have it: Three huge, immediately accretive and transformative deals in the pipeline space.

The key takeaway from all this M&A merriment? While at first blush the pipeline sector may seem boring, it still offers a lot of growth potential for portfolios — and that growth ultimately translates into bigger tax-advantaged dividends for investors. As we all know, dividends[22] are a key component to total returns.

In the end, investors should own a big swath of pipeline firms in their portfolios — and now could be a great time to add them. Fiscal cliff worries about rising dividend taxes[23] have chopped down share prices for many of these firms, despite the fact that MLP distributions don’t count as qualified dividends in the first place. Plus, all three of the leaders in this article now sit well below their 52-highs and promise to pay bigger dividends down the road with these deals.

Snatch them up now before the market gets wise.

As of this writing, Aaron Levitt did not own a position in any of the aforementioned securities. However, the author may initiate a long position in WMB within 72 hours.

Endnotes:
  1. recent decision: http://investorplace.com/2012/12/canada-oil-patch-business-as-usual/
  2. CEO: http://studio-5.financialcontent.com/investplace/quote?Symbol=CEO
  3. NXY: http://studio-5.financialcontent.com/investplace/quote?Symbol=NXY
  4. energy independence: http://www.investorplace.com/2012/04/energy-independence-first-the-pipelines/
  5. CHK: http://studio-5.financialcontent.com/investplace/quote?Symbol=CHK
  6. pipelines: http://www.investorplace.com/2012/03/pipe-profits-into-your-pockets/
  7. Chesapeake Midstream Partners: http://investorplace.com/2012/06/the-right-chesapeake-to-buy-midstream-partners/
  8. ACMP: http://studio-5.financialcontent.com/investplace/quote?Symbol=ACMP
  9. WMB: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMB
  10. pay roughly $2.4 billion: http://www.reuters.com/article/2012/12/12/chesapeake-midstream-idUSL1E8NBIA120121212
  11. Marcellus: http://investorplace.com/2012/11/a-far-more-muscular-marcellus-shale-beckons/
  12. WPZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=WPZ
  13. master-limited partnership: http://investorplace.com/2012/10/the-irs-gives-energy-investors-a-gift/
  14. SE: http://studio-5.financialcontent.com/investplace/quote?Symbol=SE
  15. buy the Express-Platte System: http://www.reuters.com/article/2012/12/11/us-spectraenergy-expressplattepipeline-idUSBRE8BA0DK20121211
  16. KMP: http://studio-5.financialcontent.com/investplace/quote?Symbol=KMP
  17. natural gas: http://investorplace.com/2012/10/new-pipelines-could-chill-natural-gas-prices/
  18. TLLP: http://studio-5.financialcontent.com/investplace/quote?Symbol=TLLP
  19. CVX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVX
  20. Northwest Products System: http://www.reuters.com/article/2012/12/11/idUS208007+11-Dec-2012+HUG20121211
  21. existing terminals: http://www.investorplace.com/2012/09/time-to-dive-into-downstream-mlps/
  22. dividends: http://investorplace.com/hot-topics/dividends/
  23. rising dividend taxes: http://investorplace.com/2012/12/snatch-up-special-dividends-through-etfs/

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