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Spectra to Get Express-Platte

KMP SE

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Spectra Energy Corporation (SE - Analyst Report) has inked an agreement to purchase the Express-Platte Pipeline System from Kinder Morgan Energy Partners L.P. (KMP - Analyst Report), the Ontario Teachers’ Pension Plan and Borealis Infrastructure.

The transaction, valued at $1.49 billion, involves 100% ownership of the pipeline system that includes both the Express and Platte crude oil pipelines. The purchase price will comprise $1.25 billion in cash and $240 million in acquired debt. The deal is expected to close in the first half of next year.

Spectra Energy, through its subsidiaries and equity affiliates, engages in the ownership and operation of a portfolio of complementary natural gas-related energy assets. Taking into consideration the weak gas price scenario, the latest deal will enable Spectra to gain a foothold in the ever increasing North American crude oil pipeline market, while decreasing its dependency on natural gas. Express-Platte is one of the three main pipelines that transports crude oil from Western Canada to refineries in the Rocky Mountain and Midwest regions in the U.S.

The 1,700-mile Express-Platte pipeline system ships oil from Hardisty, Alberta to Wood River, Illinois. Express pipeline, which has a capacity of 280,000 barrels a day, takes crude oil to the U.S. refining markets in the Rockies area, mainly Billings and Laurel, Montana, and Casper, Wyoming. The Platte pipeline’s daily capacity ranges from 164,000 barrels in Wyoming to 145,000 barrels in Wood River, Illinois. The line is linked with Express pipeline in Casper, Wyoming, and carries crude oil mainly from the Bakken and Western Canada to refiners in the Midwest.

Spectra said that the acquisition will likely add 3 to 5 cents per share to annual earnings in the first year and intends to invest in oil and refined products pipelines, storage tanks and terminals.

Given Spectra Energy’s market leading position in developing and operating pipelines, its diversified asset portfolio and strong investment opportunities, we expect it to sustain its growth momentum backed by strong performances across all business segments.

However, the company reported lower-than-expected third quarter results mainly due to lower commodity price realizations. Though most of Spectra Energy’s revenues are based on regulated tariff rates, an unfavorable macro environment may result in lower earnings and cash flows. Moreover, with a relatively heavy debt-to-capitalization ratio of 51.2% during the third quarter, the company’s balance sheet remains highly leveraged.

Currently, the company retains a Zacks #4 Rank (short-term Sell rating). We maintain our long-term Neutral recommendation on the stock.
 

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