In a deal valued at $6 billion, Enterprise Products Partners LP (NYSE: EPD) has widened the pathway from wellhead directly to global markets for crude, gas and other refined petroleum products.

Enterprise announced plans in early October to acquire Oiltanking Partners LP (NYSE: OILT) in a two-step merger process. Through the merger, the Houston company will unlock access to waterborne markets from the active Gulf Coast region.

Enterprise’s large investment shows confidence in the ability of Gulf Coast refineries to continue supporting the production growth spurred by shale plays.

“The combination of Enterprise’s system of midstream assets and Oiltanking Partners’ access to waterborne markets and crude oil and petroleum products storage assets would extend and broaden Enterprise’s midstream energy services business,” the company said.

Sunil Sibal, senior analyst, Global Hunter Securities, said assets along the Gulf Coast should encourage additional opportunities.

“We view EPD's acquisition of Oiltanking as a strategic move to further integrate along the value chain, especially as the U.S. shale production is getting exceedingly dependent on export of liquids hydrocarbons to support continued growth,” Sibal said.

Oiltanking Partners assets include: the Houston Terminal, with storage capacity of about 18 million barrels (MMbbl), six ship docks and two barge docks capable of loading crude, refined products and NGL.

The company, also based in Houston, has expansions underway that would increase storage capacity to 23.2 million barrels (MMbbl) by end of 2015, and it recently leased 58 acres of land, providing additional growth run room in this premium area. The Beaumont Terminal is expected to expand capacity to 11.2 MMbbl by end of 2016, with potential to expand by another 20 MMbbl.

Ed Hirs, an energy economist from University of Houston and managing director of Hillhouse Resources LLC, said the deal secures a way for the midstream service company to get its product to market.

“It’s much better for Enterprise to vertically integrate its transport options so they won't be stuck in the event that there's a huge new flow or someone starts raising prices on them,” Hirs said.

Oiltanking Partners’ marine terminal on the Houston Ship Channel is connected with Enterprise’s Mont Belvieu facility and integral to the company's growing LPG export, octane enhancement and propylene businesses. Its ECHO facilities are also connected to Oiltanking’s system.

Merging the companies would extend and broaden Enterprise’s business beyond the U.S., said Michael A. Creel, CEO of the company’s general partner, in a statement.

"This combination would benefit our producing and consuming customers by enhancing their respective access to supplies, domestic and international markets and storage,” Creel said.

Gulf Coast

U.S. exports of petroleum products increasingly make their destination to the Gulf Coast region, the Energy Information Administration (EIA) said in a September report.

Product exports, year-to-date through June, averaged 3.7 MMbbl/d, which is up 543,000 bbl/d over last year. The Gulf Coast accounted for 72% of that total growth, the EIA reported.

Refineries in the Gulf Coast region are extremely competitive in the global market, according to the EIA. The region’s advantage is a result of refineries access to cost-advantaged inputs, upgrading capacity and proximity to significant demand centers.

Additionally, the Gulf Coast has the infrastructure in place to move vast quantities of crude, natural gas and products which is being produced from the shale plays, Hirs said.

“This is the clearinghouse for the nation's production,” he said.

As with similar companies, Enterrise is deeply invested in the Gulf Coast. Over the past three decades, Enterprise has loaded or unloaded over 3,500 ships with more than 600 MMbbl of LPG across Oiltanking Partners’ docks. The company estimates that it is responsible for nearly 40% of Oiltanking Partners’ 2013 EBITDA.

Earlier this year, the company converted its marine terminal in Beaumont, Texas, to support the export of refined products. The terminal has access to more than 12 MMbbl of refined products storage and receives products from eight refineries, representing almost 3.3 MMbbl/d of capacity.

In May, Enterprise announced it loaded its first cargo of refined products for export from the Beaumont Marine Terminal.

The conversion further strengthens the Gulf Coast region as the primary gateway for refined products exports, said A.J. “Jim” Teague, COO for Enterprise’s general partner, in a May 20 release.

“A dramatic increase in domestic crude oil production, driven by the shale revolution, combined with lower domestic demand for motor gasoline and expanded refining capacity along the Gulf Coast, has transformed the U.S. into a net exporter of refined products in less than seven years,” Teague said.

Enterprise announced in June it will build an ethane export facility on the Houston Ship Channel. It also plans to construct a pipeline from its Mont Belvieu, Texas, NGLs fractionation and storage complex, providing direct access to ethane supply. The facility is expected to begin operations in the third quarter of 2016.

Takeover Timeline

In the deal with Oiltanking Partners, Enterprise acquired about 15.9 million common units and 38.9 subordinated units in the company held by Oiltanking Holding Americas Inc. Enterprise paid total consideration of about $4.1 billion in cash and common units to Oiltanking Holding. It also assumed notes receivable issued by Oiltanking Partners.

Under the proposed merger, Enterprise would exchange 1.23 Enterprise common units for each Oiltanking Partners common unit. The proposed consideration of $1.4 billion represents an at-market value for Oiltanking Partners common units based upon the volume weighted average trading prices of both companies on Sept. 30.

Enterprise funded the total cash consideration of $2.438 billion from cash on hand and borrowings under its commercial paper facility and a new $1.5 billion 364-day revolving credit facility. Citi was lead arranger for the facility, which matures in September 2015.

Deutsche Bank Securities Inc. was financial adviser and Vinson & Elkins LLP to Oiltanking Holdings. Skadden, Arps, Slate, Meagher & Flom LLP and Associates was its legal advisers.

Citi was financial adviser and Andrews Kurth LLP and Akin Gump Strauss Hauer & Feld LLP was legal counsel to Enterprise.

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