National Post (National Edition)
Brookfield's budding energy empire
Brookfield Infrastructure has spent billions of dollars buying up hydrocarbons infrastructure in Western Canada, primarily in the natural gas business, but its proposed acquisition of Inter Pipeline Ltd. marks a major foray into oil infrastructure — and some analysts believe the company isn't done yet. The Toronto-based asset manager labelled Inter Pipeline's share price performance as “strained” this week as it launched a takeover bid for the Calgary-based pipeline operator, which sent the target company's shares soaring.
Inter Pipeline's shares rose more than $4 per share to $17.43 by close on Friday, from $13.29 when trading on the Toronto Stock Exchange opened on Monday. The closing price was well above Brookfield's offer price of $16.50 per share.
Inter Pipeline responded that it has not received a formal offer from Brookfield and its previous offers of $17 per share and $18.25 per share “did not reflect the intrinsic value of the company.”
Brookfield likely has room to sweeten the deal given the number of “bells and whistles” among Inter Pipeline's assets that are valuable to the acquirer, said Rafi Tahmazian, director and senior portfolio manager with Canoe Financial, whose fund is invested in Inter Pipeline.
He said he was very pleased to see the bid for the company.
“Mainstream capital has entered the market,” Tahmazian said, adding that he believes Brookfield's presence could bring other institutional investors into the Western Canadian energy sector given the size of its proposed investment, and a recent uptick in oil and gas mergers and acquisitions activity in Calgary.
“There's a chance this'll be the sweetest and easiest of the deals to do,” Tahmazian said.
Robert Hope, an analyst at Scotiabank, wrote in a note that “bidding starts at $16.50,” suggesting a higher price may materialize, but believes Inter Pipeline may struggle to find a competing offer, given — among other things — the risks associated with the company completing and contracting the $5-billion Heartland petrochemicals project.
“While we expect Pembina (Pipeline Corp.) will take a look, we don't believe that it is interested in adding leverage and commodity exposure at this point,” Hope said in a note. “Of the large U.S. midstreamers, we feel the leverage would be too much for Kinder Morgan, and Enterprise Products is more focused on (petrochemicals) on the U.S. Gulf Coast. Energy Transfer (Partners) and Plains (All American Pipeline) have some minor Canadian operations, but we think IPL would be too large to buy.”
In recent years, Brookfield Infrastructure has been eyeing assets in the wider energy infrastructure space. In 2020, the company generated 15 per cent of its cash flows from its midstream business and the company has said it continues to see more opportunities to invest in midstream companies and assets.
The Toronto-based asset manager could also be a logical bidder for the federally-owned Trans Mountain pipeline and expansion project, especially if its hostile takeover of Inter Pipeline is successful, National Bank Financial analyst Patrick Kenny.
“From a long-term perspective with the Trans Mountain expansion, if all goes well, I definitely think they would look at owning that project,” Kenny told Financial Post.
Inter Pipeline operates oilsands pipelines that run from northeastern Alberta to the Edmonton area, which is the starting point for the federally-owned Trans Mountain pipeline and expansion project that runs from Edmonton to an export terminal in Burnaby, B.C.
The 590,000-barrels-perday Trans Mountain expansion project is currently under construction, and will expand the ability of heavy oil producers to export their product off the West Coast.
“It would make sense within Inter Pipeline's footprint, but I don't think Inter Pipeline can do it by itself,” Stifel FirstEnergy analyst and managing director Ian Gillies said of the potential fit between Inter Pipeline's assets and the Trans Mountain project.
Brookfield declined to comment on potential interest in acquiring the Trans Mountain project.
Brookfield, which owns nearly 20 per cent of Inter Pipeline, has yet to formalize its bid and Inter Pipeline may yet choose to negotiate a deal, but “the shareholder base is definitely looking at this as a positive,” National Bank's Kenney said.
The analyst also said Brookfield has invested in other oil and gas assets in Western Canada and there's a “value chain” the company could put together if the Inter Pipeline deal closes and the company is taken private.
In an investor presentation last September, BIP said that midstream assets were “out of favour,” and “energy markets dislocation were creating value opportunities” for the company. BIP was also eyeing assets from an oil major that was eager “to sell assets to redeploy in core businesses and renewables.”
While the company is eager to maintain its sustainable investment credentials, Bahir Manios, BIP's chief financial officer, told investors in a Feb. 3 earnings call that the company will continue to own and operate certain essential infrastructure assets globally that transport fuel.
“While natural gas-related assets make up only a portion of our diversified portfolio, we believe that they play an important role in the global energy transition that is well underway, particularly in Asia, and as a bridge to renewables and potentially hydrogen,” Manios said.
In Sept. 2020, the company and its partners spent $1.5 billion to purchase a 21-per-cent interest in Houston-based Cheniere Energy Partners LP, which operates two liquefied natural gas export terminals on the U.S. Gulf Coast.
Brookfield Infrastructure also spent $4.3 billion in July 2018 to acquire natural gas gathering and processing facilities in Western Canada from Calgary-based pipeline giant Enbridge Inc. to create NorthRiver Midstream.
The company already owns a gas processing and storage business with assets in Alberta called RockPoint Gas Storage and has also spent billions on customer-oriented energy businesses including its Aug. 2018, $4.3-billion purchase of Enercare Inc., which sells and distributes heating systems.
Brookfield Infrastructure's investor presentation says its “energy business has no direct commodity exposure,” though other companies in the broader Brookfield group have invested in companies such as Calgary-based Second Wave Petroleum in the past.
Indeed, other Brookfield businesses have also spent billions in the oil and gas sector in recent years. Brookfield Asset Management, Brookfield Infrastructure's parent company, invested alongside Ontario Teachers' Pension Plan and other funds in June 2020 for a 49-per-cent stake in a natural gas pipeline in Abu Dhabi valued at US$10.1 billion.
In 2016, BIP and other institutional clients of Brookfield Asset Management acquired a 90-per-cent stake in Nova Transportadora do Sudeste SA, a system of natural gas transmission assets in the southeast of Brazil from Petróleo Brasileiro SA, better known as Petrobras, for approximately US$5.2 billion.