MIDSTREAM NEWS
Water Midstream Comples Pipeline Extension in Midland County
Water Midstream Partners LLC has completed the southern extension to its Midland County commercial pipeline system, connecting new oil and gas wells inside and adjacent to the city of Midland to its Saltwater Disposal Well (SWD) on SH 158. This extension brings the total miles of this pipeline system to 9.5 miles, adding to the more than 45 miles of operator-owned pipelines that connect to Water Midstream's Midland County SWD. The extension will create direct pipeline connections for salt water disposal for more than 100 existing and planned wells, reducing operator costs for saltwater transportation and disposal, and eliminating as many as 300 daily trips by water hauling trucks on county and state roads.
Kinder Morgan strikes deals with Riverstone, Southern Company
In separate deals, Kinder Morgan Inc. has partnered with Riverstone Investment Group LLC and Southern Company.
Agreeing to an upfront cash payment at closing, Riverstone Investment Group LLC will become a 50% partner in the Utopia Pipeline Project. The payment consists of reimbursement to KMI for its 50% share of prior capital expenditures related to the project and a payment in excess of capital expenditures.
In addition to the acquisition of the existing assets, Riverstone has agreed to fund its share of future capital expenditures necessary to complete construction and commissioning of the pipeline project. The total project cost is estimated to be approximately $500 million (excluding capitalized interest).
The pipeline will connect with an existing Kinder Morgan pipeline and associated facilities in order to transport ethane and ethane-propane mixtures to petrochemical companies operating in Ontario, Canada. The project is supported by a long-term contract with Nova Chemicals Corp. Credit Suisse acted as the exclusive financial advisor to KMI for the transaction.
In an investor note following the announcement, Deutsche Bank analysts recalled KMI's goals stated during the company's January 2016 Analyst Day: "high-grade the backlog, reduce capex, execute on the growth plan, and preserve current cash flow - this deal hits all four marks."
In a separate deal, Kinder Morgan has entered a natural gas pipeline venture with Southern Company, selling a 50% equity interest in the Southern Natural Gas (SNG) pipeline system to Southern Company. Kinder Morgan will continue to operate the system. The agreement commits the companies to cooperatively pursue specific growth opportunities to develop natural gas infrastructure for the strategic venture.
SNG is a 7,600-mile pipeline system connecting natural gas supply basins in Texas, Louisiana, Mississippi, Alabama and the Gulf of Mexico to markets in Louisiana, Mississippi, Alabama, Florida, Georgia, South Carolina and Tennessee. SNG is a principal transporter of natural gas to Alabama, Georgia and South Carolina.
Inclusive of existing SNG debt, the transaction equates to an SNG total enterprise value of approximately $4.15 billion which implies a value of $1.47 billion for Southern Company's 50% share of the equity interest.
Jones Day, Gibson Dunn & Crutcher LLP, Troutman Sanders LLP and Balch & Bingham LLP are serving as legal counsel to Southern Company, and Bracewell LLP and Weil, Gotshal & Manges LLP are serving as legal counsel to Kinder Morgan.
Deutsche Bank analysts said the deal "values the asset at $4.15b (EV) and implies a 10.4x multiple on SNG's ~$400m in current run-rate EBITDA (CY15 statements)."
The deal is "a departure from the current strategy of selling development assets with large capex obligations (seen two weeks ago with Utopia), but is a result of SNG's largest customer (SO) approaching with an offer ~1 yr ago," the analysts continued in an investor note following the announcement. Calling the deal a "great transaction," Deutsche Bank said proceeds from the deal and the deconsolidation of SNG's $1.2 billion in debt "will lead to a roughly $2.7 billion overall decrease in balance sheet debt."
Moody's affirmed their Baa3/Stable rating post KMI's announced sale of 50% of SNG.
Devon sells Access Pipeline to Wolf Midstream for US$1.1B
Devon Energy Corp. has entered into a definitive agreement to sell its 50% ownership interest in Access Pipeline to Wolf Midstream Inc., a portfolio company of Canada Pension Plan Investment Board, for CAD $1.4 billion, or USD $1.1 billion. The agreement also includes the potential for an incremental CAD $150 million (US$120 million) payment with the sanctioning and development of a new thermal-oil project on Devon's Pike lease in Alberta, Canada.
Under terms of the agreement, Devon's thermal-oil acreage is dedicated to Access Pipeline for an initial term of 25 years. A market-based toll will be applied to production from the company's three Jackfish projects. As a result, Devon expects its lease operating expense at the Jackfish complex to increase by approximately US $100 million on an annualized basis.
The agreement also includes the potential for the Access Pipeline toll to be reduced by as much as 30% with the development of new thermal-oil projects in the future. The company's next potential project is the first phase of Pike, which is located immediately adjacent to the Jackfish complex. Devon is the operator of this joint venture leasehold with a 50% working interest.
Capital One Securities analyst Phillips Johnston said the sale is modestly positive for three reasons. First, he said, the price hits above Wall Street estimates of ~$1.0 billion. Second, "the sale will modestly compress DVN's YE17/YE18 leverage ratios from 3.1x/2.7x to 2.8x/2.4x. This assumes US$1.0 billion of after-tax cash proceeds (DVN has previously indicated that a sale of Access would result in 5% - 10% tax leakage, so we assume 10%), and it assumes that DVN's annual OPEX increases by ~$100 million," (slightly above the $80 million estimated by Capital One the day prior), Johnston said, noting that number could be reduced if Pike is sanctioned. "We estimate the sale also reduces '17/'18 EV/EBITDA multiples by ~0.3x to 11.3x/9.5x," and finally, he said, "the sale is accretive to our NAV estimate by $1, bringing it to $41. We believe there is a good chance that DVN further accelerates activity in the STACK and Delaware Basin later this year beyond the three incremental rigs that management announced in mid-June."
Sanchez Production Partners executes $44M midstream asset sale
Sanchez Production Partners LP (SPP) has acquired Sanchez Energy Corp.'s 50% interest in Carnero Gathering LLC for an initial payment of approximately $37 million and the assumption by SPP of remaining capital commitments to Carnero Gathering, which are estimated at approximately $7.4 million.
Carnero Gathering, a joint venture that is 50% owned by Targa Resources Corp., will own approximately 45 miles (10 miles of which remain under construction) of high pressure natural gas gathering pipelines that currently connect SPP's existing Western Catarina Midstream system to nearby pipelines in South Texas (the Carnero Gathering System). The Carnero Gathering System will ultimately connect to a cryogenic natural gas processing plant that is under construction in La Salle County, Texas owned by a separate joint venture between Sanchez Energy and Targa. Sanchez Energy has invested close to $26 million in Carnero Gathering since entering the JV in October 2015. The processing plant is expected to be operational in early 2017.
In addition to the initial payment and reduced capital commitments, Sanchez Energy will be entitled to receive future payments from SPP that are dependent upon the achievement of certain volume, transportation fee and delivery targets.
Stifel analysts say the deal improves the balance sheet modestly. "We view the sale positively and project YE16 net debt/TTM EBITDA of 5.6x compared to our prior estimate of 5.7x, while our 2016 interest coverage estimate of 5.9x remains unchanged. We forecast YE16 liquidity of ~$650MM."
The analysts maintain a hold rating "based on challenging well economics and near-term commodity price headwinds."
Resolute makes Permian sale
Resolute Energy Corp. has entered into a series of related agreements with an undisclosed Permian Basin midstream company pursuant to which Resolute and an existing minority interest holder will sell the gas gathering and water handling systems currently operated by Resolute in its Appaloosa and Mustang project areas in Reeves County, Texas, for aggregate gross consideration of up to $110 million.
This consideration is comprised of two components: 1) a $50 million payment for the assets currently in place and 2) up to $60 million in earn-out payments tied to field drilling activity through 2020 that will deliver gas and produced water into the system. Resolute will receive $32.85 million of the initial payment, while the company's partner in the Mustang area will receive the balance of $17.15 million.
The earn-out payments will be based on the completed lateral lengths of wells and the year in which a well is spud. Payments are available through 2020, with a ceiling of $60 million (gross). Earn-out payments for Appaloosa area wells will be paid 100% to Resolute and payments for Mustang area wells will be allocated 60% to Resolute and 40% to Resolute's partner. In addition to the initial payment, at closing Resolute will receive approximately $2.3 million in earn out payments for wells previously completed as part of its 2016 drilling program.
Wunderlich Securities analysts upgraded the company to a Buy rating, noting Resolute Energy "has done a nice job of selling assets and paying down debt but still has a significant leverage position. As such, we would like to see REN attempt to reduce its debt to further improve the balance sheet. With its higher priced hedges rolling off this year, we do see a drop in average prices, but we also think it will continue to grow nicely; there are improvements operationally that helps REN financially and could help improve the $105 million in liquidity."
Petrie Partners LLC acted as financial advisor to Resolute on the transaction.
Cameron LNG expansion receives Non-FTA export authorization
Cameron LNG received authorization from the US DOE to export an additional 1.41 bcfd from its proposed Louisiana liquefaction expansion project to countries that do not have a free-trade agreement with the US. With this order, Cameron LNG's export capacity will be 24.92 million tons per annum or 3.53 bcfd.The expansion project will be located next to the Cameron LNG terminal and liquefaction facilities that were approved for construction in 2014 in Hackberry, La.
Construction on the first phase of the $10B liquefaction project (trains No. 1-3) is underway. The proposed expansion profect is subject to additional agreements, consents, and approvals as well as financing and final investment decision. Cameron LNG Holdings LLC is a joint venture owned by affiliates of Sempra Energy, ENGIE, Mitsui & Co. Ltd. and Japan LNG Investment LLC.