Kinder Morgan Inc. purchased Hiland Partners for $3 billion

March 31, 2015
Kinder Morgan Inc. acquired Hiland Partners, a small pipeline operator, in a deal that gave KMI what Moody's described as KMI's "initial footprint in the Bakken" and helped diversify the largest US midstream company's crude oil transportation business.


Kinder Morgan Inc. acquired Hiland Partners, a small pipeline operator, in a deal that gave KMI what Moody's described as KMI's "initial footprint in the Bakken" and helped diversify the largest US midstream company's crude oil transportation business.

Richard D. Kinder, KMI chairman and chief executive officer, was upbeat about KMI's decision to acquire Hiland Partners from Harold Hamm and certain Hamm family trusts for $3 billion. The deal was announced in January as oil prices fell and producers trimmed budgets.

He called the acquisition "a substantial midstream footprint in one of the most prolific oil-producing basins," noting that Hiland's gathering pipelines connect with wells in North Dakota and Montana that remain profitable.

"We don't think it's nearly as bleak as other parts of production," Kinder said during a Jan. 21 conference call. "If there is a silver lining in these clouds of low commodity prices, it's going to be the ability to make some extremely good acquisitions over the next 12 months."

Moody's credit ratings agency described the transaction as being credit positive for Hiland.

"Hiland holds a first-mover and premier position in the prolific Bakken, primarily in North Dakota," said Edwin Wiest, Moody's vice-president and senior credit officer. He noted Hiland also has "a significant acreage dedication from Continental Resources, the largest acreage holder in the Bakken."

Kinder said KMI would pursue "incremental growth opportunities in the basin." KMI is acquiring assets, mostly fee-based, that involve crude oil gathering and transportation pipelines and gas gathering and processing systems.

KMI said it acquired a "significant amount of acreage dedicated under long-term gathering agreements." Hiland's customers include Continental Resources Inc., Oasis Petroleum Inc., XTO Energy Inc., Whiting Petroleum Corp., and Hess Corp.

Hiland's has 1,225 miles of crude oil gathering pipelines in North Dakota and Montana. At closing in Febuary, the crude oil gathering systems had more than 1.8 million acres dedicated under long-term, fee-based agreements with Bakken oil producers.

Continental has dedicated most of its Bakken acreage to Hiland's gathering systems under a long-term agreement, including acreage in McKenzie, Mountrail, and Williams counties in North Dakota.

Hiland's 485-mile Double H crude oil transportation pipeline will transport crude oil from Hiland's Dore Terminal in North Dakota to Guernsey, Wyo., where Double H interconnects with the Pony Express Pipeline to Cushing, Okla.

Double H pipeline has initial capacity of 84,000 b/d, with an expansion to 108,000 b/d in 2016. The pipeline has firm take-or-pay contracts for 60,000 b/d and sought additional commitments (OGJ Online, Nov. 20, 2014).

Wiest of Moody's said, "The recent completion of Hiland's Double H Pipeline provides a much-needed outlet for crude production in the core of the Bakken region, an area in which it is still economic to drill and produce despite today's depressed crude oil prices. We expect that about 85% of Hiland's cash flow will be fee-based."

Hiland's systems in North Dakota and Montana process associated gas and have 3.7 million acres dedicated under long-term agreements with producers. Additionally, Hiland's Midcontinent systems gather and process gas in the Woodford shale and other areas of Oklahoma.

KMI planned to retain nearly all of Hiland's 430 employees. Kinder said the acquisition was expected to be modestly accretive in 2015-16.

"Kinder Morgan's projections for Hiland are reflective of the current commodity-price environment," he said. "While Hiland's gathering systems serve some of the Bakken's and North America's most economic acreage, the projections incorporate announced reductions in drilling activity by Hiland's customers."

In January, Credit Suisse analyst John Edwards maintained an outperform rating on KMI.

Edwards said he was "surprised" KMI planned to acquire Hiland Partners. He called the transaction "modestly accretive" for 2015-16. "Despite what otherwise looks like an expensive transaction…we view this as a modest positive."

KMI last year acquired all outstanding equity securities of Kinder Morgan Energy Partners LP, Kinder Morgan Management LLC, and El Paso Pipeline Partners LP, creating a single publicly traded security, for a total purchase price of $71 billion (OGJ Online, Aug. 11, 2014).