Fresh off pulling itself together into a pipeline giant, Kinder Morgan Inc. (NYSE: KMI) said Jan. 21 it will buy midstream assets in the core of the Bakken Shale for $3 billion.
Kinder Morgan announced an agreement to acquire Hiland Partners from Harold Hamm, chairman and CEO of Continental Resources Inc. (NYSE: CLR). The purchase price includes assumption of debt.
The transaction is modestly accretive to Kinder Morgan’s cash flow in 2015-16, including capital investments of $850 million.
“As predicted, KMI wastes no time bagging M&A deal post-MLP takeout,” Tudor, Pickering, Holt wrote in a Jan. 22 report.
In November, Kinder Morgan closed the acquisition of several connected MLPs, putting Kinder Morgan Energy Partners LP (NYSE: KMP), Kinder Morgan Management LLC (NYSE: KMR) and El Paso Pipeline Partners LP (NYSE: EPB) under one roof for about $76 billion.
The company lived up to its reputation as contrarians by buying into the Bakken at a time of extreme bearishness, shortly after eliminating MLPs at a time of peak MLP valuations, Tudor said.
Still, forecasts of more than 20% gathering growth per year deserve scrutiny, the firm said. “CLR’s Bakken capex has been cut dramatically and current rigs drive mid-to-high single digit volume growth,” Tudor said.
Continental said in December its 2015 capex would tumble 40% to $2.7 billion compared to 2014.
“Admittedly, revenue mix and market share may drive growth beyond volumes. Ultimately, a $3 billion deal is not overly material to the KMI complex and we don’t think KMI is done with big deals in 2015,” Tudor said.
In the Bakken, Hiland’s assets are largely fee-based and include crude oil gather and transportation pipelines, gas gathering and processing systems. In North Dakota and Montana, Hiland’s crude oil gathering systems consist of 1,225 miles of gathering pipelines and more than 1.8 million acres dedicated under long-term, fee-based agreements with major Bakken oil producers.
“Hiland’s systems serve some of the Bakken’s largest and most successful producers, including Continental. We look forward to continuing to provide high quality midstream services to these producers and pursuing incremental growth opportunities in the basin,” said Richard D. Kinder, chairman and CEO of Kinder Morgan.
Hiland’s liquidity had taken a hit from the second quarter of 2014 to the third quarter, falling $156 million of 41% due to capex spent on organic growth, according to Wells Fargo Securities. In the third quarter of 2014, the company had $223 million in liquidity, including pro forma cash of $8 million.
“Although Hiland’s cash flow is largely fee-based, our projections are based on commodity prices consistent with the current forward curve for the portion that is sensitive to commodity prices,” Kinder said.
Hiland's gas gathering and processing systems offers 1,800 miles of gathering pipelines in North Dakota and Montana and, upon completion of a plant expansion in 2015, 240 million cubic feet per day of gas processing capacity and 30,000 barrels per day (bbl/d) of fractionation capacity.
The infrastructure processes associated gas from oil production and have 3.7 million acres dedicated under long-term agreements with Bakken oil producers.
Kinder Morgan’s acquisitions will serve customers such as Oasis Petroleum Inc. (NYSE: OAS), XTO Energy Inc., Whiting Petroleum Corp. (NYSE: WLL) and Hess Corp. (NYSE: HES).
The Hiland assets are owned by Hamm and certain Hamm family trusts. Though not directly tied to Continental, the transaction bears similarities to many E&P companies that have sold off midstream assets in the past year. In 2014, many of the largest deals made by E&Ps involved parting with midstream assets.
Included in the purchase is the Double H Pipeline, a 485-mile line that will transport crude oil from a terminal in North Dakota to Guernsey, Wyo. The pipeline then interconnects with the Pony Express Pipeline for delivery to Cushing, Okla., said Mark Reichman, analyst, Simmons & Co. International.
The Double H Pipeline is in the final stages of construction and is expected to begin service during first quarter of 2015 with an initial capacity of 84 Mbbl/d and an expansion to 108 Mbbl/d in 2016.
The pipeline has firm take-or-pay contracts for 60 Mbbl/d of capacity and is conducting an open season for additional commitments, Reichman said.
Bracewell & Guiliani acted as legal counsel to Kinder Morgan. UBS Securities LLC has provided a $2.025 billion bridge financing facility.
The transaction is expected to close during the first quarter of 2015.
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