FOR PIPELINES, BUYING IS THE WAY TO VALUE
Building a pipeline in North America has become a nearimpossible odyssey, as the trials and tribulations of the Northern Gateway and Keystone XL projects illustrate.
Buying “pipe in the ground” — or an entire company — is becoming a more achievable way to ensure growth.
On Tuesday, as the Labour Day long weekend faded from the calendar, Enbridge Inc. became the latest pipeline firm to pull the trigger on a major acquisition, agreeing to a friendly $37-billion merger with Houston-based Spectra Energy Corp.
The mammoth all-stock deal — the biggest in Canadian oilpatch history — will see Enbridge’s head office remain in Calgary. The combined natural gas pipeline business will be operated out of Houston, while the liquids pipelines will be run out of Edmonton.
If the deal is approved by shareholders, the merged entity will form the biggest energy infrastructure firm on the continent, with an eye-popping enterprise value of $165 billion.
Coming on the heels of TransCanada Corp. agreeing last March to acquire Houston-based Columbia Pipeline Group for US$13 billion, it’s obvious Canada’s pipeline players increasingly see mergers and acquisitions as a prime way to add value.
It’s also a way to diversify and secure growth.
Spectra, which was spun out of Duke Energy in 2006, has strength in the gas transportation business with some 140,000 kilometres of gas lines. Enbridge is a dominant oil shipper in Canada with 27,000 kilometres of liquids pipelines.
Harrie Vredenburg, with the University of Calgary’s Haskayne School of Business, said there are strong opportunities for expansion between the combined forces.
But Enbridge has also been stymied from building projects like Northern Gateway to move oil to the West Coast because of regulatory uncertainty, a problem facing other pipeline operators in Canada and the United States.
“They’re trying to grow and build their business and they’ve been frustrated because they’ve become a lightning rod for environmental opposition — climate change opposition to oil pipelines particularly — and they’re looking for alternative growth strategies. They’re not alone in doing this,” he said.
“They’ve spent a fortune, getting nowhere with regulatory systems. At the same time, the oilsands growth has slowed somewhat … it may be time to shift their portfolio somewhat.”
There’s no doubt the deal is transformative, giving Enbridge more balance between its oil and natural gas businesses.
With the merger, Enbridge will become the fourth-largest company in Canada, with assets extending from Zama City in northern Alberta to the U.S. Gulf Coast.
The two companies have about 17,000 employees currently, including 11,000 in Enbridge.
Enbridge CEO Al Monaco noted the combined operation will have six key growth platforms, with an array of pipelines, along with sizable midstream assets, utilities and a renewable energy business.
Monaco, who will stay on as chief executive, pointed out the company will also have an inventory of growth projects to pursue: $26 billion in secured capital and another $48 billion of projects waiting in the wings for development.
In an interview, Enbridge chief financial officer John Whelen said the “drive to diversify the company is key,” noting the firm has been looking to grow across different commodity types, geography and regulatory jurisdictions.
“Pipe in the ground is worth a lot these days and the ability to expand and extend existing systems ... is a lot easier sometimes than building one-off, large mega-projects.”
Indeed, it is becoming more difficult to duplicate “pipe in ground” given the intensity of the opposition coming from environmental groups, First Nations and municipal leaders against new energy infrastructure.
Whether it’s Enbridge’s Northern Gateway venture that is now up in the air, Kinder Morgan’s embattled Trans Mountain pipeline expansion, or TransCanada’s Energy East initiative, such projects face an uncertain future.
But it’s also no simple feat to put together two large, complex organizations.
Enbridge plans to sell off at least $2 billion in non-core operations — with a potential of $5 billion to $6 billion in additional monetization — and find $540 million in synergies by 2018.
It’s also worth pointing out that regardless of size, Enbridge will still face the same regulatory challenges that exist today.
“The realities of the merged company doesn’t change because they’re bigger and more diversified. They still have the same kind of political environment and the same kind of regulatory hurdles,” said Gaetan Caron, former chair of the National Energy Board.
“They still have to find ways to grow.”
But Caron, an executive fellow at the U of C’s School of Public Policy, likes the idea of the Canadian-based company becoming larger and more diversified, as do some analysts and shareholders.
Izabel Flis, a research analyst with Franklin Bissett Investment Management, which holds Enbridge stock, said that’s part of the attractiveness of the union.
“I think it’s definitely been influenced by the fact larger-sized organic growth projects have been so challenging to pursue on both ends of the border. But I do believe this one has a lot of potential."