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  • Roger S. Conrad

Midstream Takeover Targets

By Roger S. Conrad on Oct. 20, 2016

Merger and acquisition activity continues to heat up in the midstream segment, with gas pipelines emerging as the primary target.

International Portfolio holding TransCanada Corp’s (TSX: TRP, NYSE: TRP) agreement to acquire Columbia Pipeline Partners LP (NYSE: CPPL) comes on the heels of the Canadian pipeline giant’s purchase of the master limited partnership’s (MLP) general partner, Columbia Pipeline Group.

Given the targets’ growth prospects in the Marcellus Shale, TransCanada opted to retain all this upside for itself and not dilute the growth story by combining the MLP with TC Pipelines LP (NYSE: TCP), a partnership under its auspices that owns mature gas pipelines.

Management expects the cash flow generated by Columbia Pipeline Group’s existing assets and returns from its current slate of projects to enable TransCanada to grow its dividend at an annual rate of 8 percent to 10 percent. TransCanada Corp rates a buy up to US$50 per share for conservative investors.

Enbridge’s (TSX: ENB, NYSE: ENB) blockbuster acquisition of Spectra Energy Corp (NYSE: SE) shifts the Canadian midstream giant’s revenue mix toward natural gas and provides a near-term growth platform in the Marcellus Shale that should help to offset project cancellations on the oil side.

Spectra Energy’s primary asset is a 76.2 percent interest in MLP Portfolio holding Spectra Energy Partners LP (NYSE: SEP), which boasts one of the most secure cash flow streams among midstream MLPs and an impressive backlog of growth projects that transport natural gas from the Marcellus Shale.

Given the ease with which Spectra Energy Partners can raise capital and the the MLP’s appeal as a pure play on gas-related midstream infrastructure, we doubt that Enbridge would look to combine the partnership with Enbridge Energy Partners LP (NYSE: EEP)—at least not in the near term. Spectra Energy Partners LP continues to rate a buy up to $54 per unit.

Of Utility

Electric utilities have also leveraged their low cost of capital and pull on the demand side to acquire interests in gas pipelines delivering volumes to their facilities.

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    • Elliott H. Gue

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Roger S. Conrad

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor