Pipeline giant born in $37B deal
Union of Calgary-based Enbridge and Houston’s Spectra a ‘win-win’
Enbridge Inc.’s $37-billion merger with Spectra Energy Corp. will create a new integrated pipeline “colossus” with a massive $48 billion worth of potential future projects.
Calgary-based Enbridge announced Tuesday it would merge with Houston-based Spectra in an all-share deal to create the largest pipeline company by market value on the continent — leapfrogging competitor Kinder Morgan Inc.
The combined company, which would retain the Enbridge name, would have $26 billion worth of projects currently underway and $48 billion worth of projects planned following 2019.
“What we have here is a tremendous menu of options,” Al Monaco, president and CEO of the company, said Tuesday. adding the combined company could invest in natural gas pipeline projects in various parts of the U.S., export pipelines or in other sectors such as offshore wind power generation.
“That’s what you want in this business is an ability to pick and choose the best projects,” he said.
JP Morgan analyst Jeremy Tonet called the combined Enbridge/ Spectra entity an “energy infrastructure colossus” in a research note, with a combined $74 billion “growth backlog.”
He said the deal looks like “an attractive win-win” for both pipeline companies, and noted that the combined entity would also rank as the fourth-largest company in Canada.
The merger combines Enbridge’s network of oil pipelines with Spectra’s natural gas pipeline system.
It would give Enbridge the ability to ship natural gas to major population centres in the U.S. northeast and to deliver gas from Pennsylvania to Mexico.
Both Monaco and Spectra president and CEO Greg Ebel said that combining those two networks will allow the new corporation to deliver oil or gas from all of the major production areas in North America to most of the main markets for those commodities.
“You get pipelines that serve the best demand markets on the liquids and gas side and reach back to virtually every major supply region and that is a very powerful opportunity for customers,” Ebel said.
TD Securities analyst Linda Exergailis said in a note the deal “diversifies Enbridge’s geography and business mix.”
Monaco said Enbridge had been looking to diversify the company’s primarily oil-focused pipeline system for roughly two years — a process that culminated in the deal for Spectra.
The deal gives Enbridge significant presence in natural gas-rich Pennsylvania, where competitor TransCanada Corp. also made a major acquisition this year when it bought Columbia Pipeline Group Inc. for US$13 billion.
“We weren’t really that focused on what the other companies were doing,” Monaco said.
“Yes, there is other consolidation happening out there, but I think (the deal for Spectra) really revolves around the growth story.”
Asked whether it was easier for pipeline companies to buy rather than build pipelines in an attempt to grow, Monaco said Enbridge was not interested in buying assets that didn’t also have growth components.
“In terms of acquisitions, what we really focus on is that we’re not just buying cash flow. It’s hard to add any value to that,” he said.
He said that Enbridge looks for acquisition targets that the company can build out further.
Referring to the $48 billion in future projects, Monaco said, “this is all non-acquisition based growth.”
One area into which Enbridge hopes to grow is the southeastern U.S. population centres with new natural gas pipelines.
Spectra has been working, for example, to develop a US$2-billion Sabal Trail pipeline through Alabama, Georgia and into central Florida and that project is expected to be in service next year.
The deal is expected to close in the first quarter of next year and FirstEnergy Capital Corp. analyst Ian Gillies said in a research note Enbridge now plans to hike its dividend by 15 per cent in 2017.
The company had planned to increase its payout between 10 per cent and 12 per cent annually through 2019 — but has since
In terms of acquisitions, what we really focus on is that we’re not just buying cash flow.
extended that timeline to 2024. Gillies also noted that Enbridge plans to sell off $2 billion worth of assets over the next 12 months to give itself more financial flexibility.
The company also said it had identified ways to save $540 million once the deal closes — and plans to achieve 75 per cent of those cost savings by trimming general and administrative expenses as early as next year.
The company said it was too early to say how many jobs could be affected.
Investors of both companies liked the deal.
Enbridge shares jumped 3.85 per cent or $2.05 to $55.30 in Toronto trading.
Spectra jumped 13.4 per cent or US$4.85 to US$41 in New York.