Spectra Wraps Big Sandy Acquisition

A master limited partnership by Spectra Energy Corp. (SE - Analyst Report), Spectra Energy Partners, LP (SEP - Snapshot Report), closed its previously announced acquisition agreement with EQT Corp. (EQT - Analyst Report) for a total consideration of $390 million.

The acquired assets comprise a 70-mile regulated natural gas pipeline system –– Big Sandy Pipeline –– in eastern Kentucky.

With a daily capacity of 171 million cubic feet, Big Sandy Pipeline is interconnected with the Tennessee Gas Pipeline system that in turn links the Huron Shale and Appalachian Basin natural gas supplies to the Mid-Atlantic and Northeast markets. EQT Corp. will act as the primary transporter, with over 80% capacity locked under a 16-year transportation agreement.

Spectra Energy Partners funded the acquisition through a combination of debt and equity. We believe that this acquisition will widen the company’s presence in Huron Shale and Appalachian Basin and should be accretive to its distributable cash, which will provide further impetus for growth.The partnership expects Big Sandy Pipeline to generate net income of approximately $28.3 million, and earnings before interest, taxes, depreciation and amortization (EBITDA) of around $35 million in 2012.

On the flip side, EQT’s pipeline divestiture plan reflects its venture to prioritize capital and accelerate most cost-effective and lucrative investment opportunities like Marcellus and Huron development activities. The company now expects to drill 100 Marcellus and 120 Huron wells this year. It also expects total capital outlay to range between $1,200 million and $1,250 million, with 75% intended for well development.

Houston-based Spectra Energy Partners holds interests in more than 3,100 miles of transmission and gathering pipelines, which are responsible for the daily transportation of approximately 3.29 billion cubic feet (Bcf) of natural gas. It also has about 49 Bcf of natural gas storage in the United States.

We maintain our Neutral recommendation on both Spectra and EQT Corporation.  The quantitative Zacks #3 Rank (short-term Hold rating) for the companies indicates no clear directional pressure on the stock over the near term.

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