Midstream consolidation takes another big step…
By Kelly Gerry
Enbridge and Spectra have announced their intention to merge, sometime in 2017, pending regulatory approval. That sound you might have heard was a collective “wow” from across the North American midstream industry. Is this deal a sign of things to come? I think so. Here’s why.
Acquisition vs. Development. Ask Spectra, Kinder Morgan, TCPL, Enterprise (etc., etc.) about organic growth as their primary tool for expansion. The risk of building interstate or interprovincial pipelines is huge, including cost risk, schedule risk , and/or regulatory risk. Even the projects that seem straightforward, such as the Trans Mountain Anchor Loop, require multi-year investments and face significant uncertainty. With the recent cancellation of multiple pipeline projects and the efforts by various stakeholders to stop pipelines at any cost, what should a company do? At this time, buying into permitted projects, acquiring systems and merging with competitors is becoming a more attractive and rewarding mechanism for growth.
Size + Diversity = Stability. Fitch recently reviewed Spectra’s credit ratings and had this take: “[The company’s] ratings are supported by the size, diversity and quality of its natural gas-related infrastructure asset base.” No brainer, right? As I write these comments, Spectra is a $41 billion firm. The new “Specbridge” will be $127 billion, with a new industry-leading geographic spread across North America. As for diversity, “Specbridge” is good stuff. Similar to the Kinder-El Paso merger (and to some degree the TCPL-Columbia gas deal), this creates a company with oil & gas portfolio balance and opens up synergies with their respective “rights-of-way” that have huge strategic value for future growth . How will the Street respond to those metrics? Early indications suggest the new company will be rewarded. It’s a pretty compelling story, no matter where we are in the market cycle…and based on where we seem to be today, there could be plenty of upside.
High Value Plays. This deal also recognizes the importance of being in the right place. Spectra and its predecessor companies have focused on what is emerging, going into areas where few play, like New York City. The Northeast is high-risk, and as it turns out, also a high-reward play for energy infrastructure. Spectra’s willingness to pursue and build there has positioned the firm as a highly desirable target for other firms trying to penetrate these markets, but coming late to the game. Both large and small midstream firms with similar strategic positions will likely have suitors coming to call, as these suitors realize that entering challenging markets is a good option.
Keeping Up With the Joneses. Consolidation is the trend – and the midstream market is ripe for it. While deals are happening everywhere – in banking, construction, consulting and other areas – the financial rewards of scale in the energy infrastructure business are big. Size offers the kind of leverage needed to access and partner with sources of capital that want serious growth and right-sized (almost utility-type) risk. In this regard, I think the new Enbridge just made a very good play in the energy industry’s collective game of chess.
The real question becomes, “Who’s next? TCPL? Williams? Enterprise?” For at least some of these players, the situation is not if, but when. Certainly the other players are considering their next steps. Obviously such steps are taken very carefully, as growth through merger isn’t without victims; just Google “ETC-Williams” for an in-depth review of what can go wrong. Having motivated partners on both sides of the deal probably makes a lot of sense in most cases.
It’s a simple exercise to extend my thoughts above to the potential rollover impact on supplier, construction and consulting firms in the midstream market. However, in these sectors there is a different reality. While size still matters, diversity can be a significant risk. Equally important are focus, industry leadership, true capability and scale. Maybe I’ll tackle those issues in a future discussion.
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