Phillips 66, Spectra Inject Cash, Assets Into DCP

Phillips 66 (PSX) and Spectra Energy Corp. (SE) are throwing their joint venture, DCP Midstream LLC, a lifesaver worth an estimated $3 billion.

Phillips 66 and Spectra Energy said Sept. 8 they entered into a nonbinding letter of intent to strengthen Denver-based DCP Midstream through an injection of assets and equity.

As part of the deal, Spectra Energy will contribute 33% ownership interest in both the Sand Hills and Southern Hills NGL pipelines to DCP. Phillips 66 will also layer on $1.5 billion in cash from its balance sheet, which is expected to pay down some of the company’s debt.

Following the transaction, Phillips 66 and Spectra Energy will remain 50/50 JV owners of DCP Midstream.

“A standalone deal is not enough to restore DCP to health,” said Tudor, Pickering, Holt & Co. in a report. Rather, this will give the company options and help it survive until commodity prices recover.

In particular, Phillips 66’s cash injection will reduce DCP's debt to about $5.5 billion from $7 billion. This decreases the company's leverage by about 8x, Tudor, Pickering, Holt & Co. said.

As of June 30 the company’s MLP, DCP Midstream Partners LP (DPM), had $24 million cash on hand and about $2.2 billion of outstanding debt composed of senior notes and borrowings under its revolving credit facility.

Throughout the year DCP has made an effort to reduce operating costs, sell certain noncore assets, and convert certain contracts from commodity price sensitive to fee-based.

In January 2015, DCP initiated a corporate restructuring plan that reduced its workforce by about 20%. The company closed its Oklahoma City regional office and reduced the number of employees in its Tulsa, Okla., and Midland, Texas, offices. Functions in those locations were relocated primarily to the company's Denver headquarters and Houston regional office.

Additionally, DCP said Sept. 1 it sold natural gas gathering and processing assets in the Midland Basin to Navitas Midstream Partners LLC. The terms of the transaction were not disclosed. The deal included about 1,000 miles of low- and high-pressure gathering pipelines and a cryogenic processing plant serving Martin, Midland and Glasscock counties, Texas.

“Given the alleviation of the leverage concerns at DCP Midstream LLC and the potential for future drop down of the Sand Hills and Southern Hills interests, we believe [the] news is positive for DPM,” said Christopher Sighinolfi, equity analyst for Jefferies LLC, in a report.

Both the Sand Hills and Southern Hills pipelines are owned one-third each by DCP Midstream Partners, Phillips 66 and Spectra Energy Partners LP (SEP), a subsidiary of Spectra Energy.

Given that the joint ownership with Phillips 66 will remain intact, the value of Spectra’s contributed interest in both pipelines is assessed at $1.5 billion, Sighinolfi said.

Sand Hills is a 720-mile pipeline that provides takeaway from the Permian Basin and Eagle Ford Shale to fractionation facilities along the Texas Gulf Coast and the Mont Belvieu market hub. It has total processing capacity of 1.2 billion cubic feet per day.

Southern Hills is a roughly 800-mile pipeline that provides takeaway in the Midcontinent to fractionation facilities along the Texas Gulf Coast and Mont Belvieu. It has processing capacity of about 2 billion cubic feet per day.

Spectra's interests in the Sand Hills and Southern Hills pipelines add about $85 million of EBITDA, according to Tudor, Pickering & Holt. This will further reduce DCP's debt/EBITDA by about 7x.

“The contribution of the one-third interests in Sand Hills and Southern Hills will diversify DCP Midstream by enhancing the balance of fee-based assets while building on the re-contracting work already underway," said Greg Ebel, chairman and CEO of Spectra Energy, in a statement.

The transaction is anticipated to close in the fourth quarter of 2015. Closing is subject to the parties entering into a definitive agreement and customary consents, including approval by Spectra Energy Partners' board of directors and regulatory approvals.

Contact the author, Emily Moser, at emoser@hartenergy.com.