Spectra Energy - Acquisition Of Express-Platte Pipeline System Makes Sense

Dec.12.12 | About: Spectra Energy (SE)

Shares of Spectra Energy (SE) ended Tuesday's trading session roughly unchanged. The owner and operator of a portfolio of complementary natural gas assets announced the $1.49 billion acquisition of the Express-Platte Pipeline System. By acquiring the pipelines Spectra gets access to the lucrative North American oil transportation market.

The Deal

Spectra Energy announced that it has entered into a definitive agreement to purchase the 100% ownership in the Express-Platte Pipeline System. Spectra will pay $1.25 billion in cash for the infrastructure and will assume $240 million in debt. The pipelines were previously owned by Borealis Infrastructure, the Ontario Teachers Pension Plan and Kinder Morgan Energy Partners LP (KMP).

The more than 1,700 mile pipelines run all the way from Alberta to Illinois and includes both the Express as well as the Platte pipeline. The Express pipeline can carry up to 280,000 barrels per day to the Rocky Mountains area, while the Platte pipeline can carry up to 164,000 barrels per day into Wyoming and Illinois.

CEO Greg Ebel commented on the deal, "The Express-Platte Pipeline System acquisition is an immediately accretive investment in a fee-based business that expands Spectra Energy's footprint into a rapidly growing area. This system is strategically located to supply crude oil to U.S. refining markets. It also represents an incremental growth platform for Spectra Energy that enables further investment in related crude and refined product assets."

Spectra expects that the deal will add roughly $130 million in EBITDA in 2013. Given the uncertain closing date, establishing a valuation multiple is a bit difficult. If the deal were to close on January 1 of 2013, the deal values assets at 11.5 times annual EBITDA.

To finance the deal, Spectra Energy has announced the issue of 12.8 million shares for $26.75 a piece, thereby raising some $342 million in gross proceeds.

The acquisition will add roughly 3 to 5 cents in earnings per share in 2013 already. The deal is subject to normal closing conditions including regulatory approval. The deal is expected to close in the first half of 2013, but an exact date is yet unknown.

Valuation

Spectra Energy ended its third quarter with $146 million in cash and equivalents. The partnership operates with $9.9 billion in long term debt, for a sizable net debt position.

For the first nine months of 2012, Spectra Energy generated revenues of $3.73 billion. Net income of controlling interests came in at $727 million, or $1.11 per diluted share. Full year revenues could approach the $5 billion mark on which the company could earn roughly $1 billion.

The market values Spectra Energy at $17.8 billion. This values the firm at roughly 3.5 times annual revenues and some 17-18 times annual earnings.

Spectra Energy pays a quarterly dividend of $0.31 per share, for an annual dividend yield of 4.5%.

Some Historical Perspective

Year to date, shares of Spectra Energy have fallen some 11%, excluding the dividend. Shares started the year around $30 per share and quickly advanced to highs of $32. Shares continued to slip away, trading near the lows for the year at $27 per share.

Trading as low as $10 during the crisis in 2009, shares steadily recovered to levels in the low thirties. Over the past years, the company reported stable revenues around the $5 billion mark and it managed to earn roughly $1 billion during each year.

Energy Deals Keep Going On

While the fiscal cliff discussions are still going on, large energy deals are still taking place. Last week, Freeport-McMoRan (FCX) fell after it agreed to acquire North American energy companies Plains Exploration & Production (PXP) and McMoRan Exploration (MMR) in a combined deal value of $20 billion. On Tuesday, Chesapeake Energy (CHK) announced to sell over some of its midstream assets to Access Midstream Partners (ACMP) for almost $2.2 billion.

Investment Thesis

The deal which Spectra strikes on Tuesday comes as a little surprise, given that Spectra buys oil assets instead of sticking to natural gas. The announcement of any kind of deal is not surprising given that Spectra aims to finish $20 billion worth of projects by the end of the decade.

CEO Ebel applauds the deal commenting, "Given today's regulatory environment, the fact that these assets are in the ground already is a huge advantage as we enter the sector."

The assets generate fee-based revenues and have annual rate escalators, thereby protecting return on assets. Large energy names including Exxon Mobil (XOM) and Phillips 66 (PSX) make use of the pipeline which helps to expand in the rapidly growing North American energy market.

The diversification efforts make sense and move Spectra away from the volatile gas business. Oil has strong growth opportunities, but the built up of oil infrastructure is not catching up. The strict regulatory and environmental rules, create a lot of headaches for energy companies trying to built pipelines between the US and Canada. Well known are the are the massive problems with TransCanada's Keystone pipeline.

The deal makes sense. It gives Spectra diversification away from gas, it immediately adds to earnings, and it gives the company a strong position in a growing market. While shares have been lagging the general market so far this year, the 4.5% dividend yield provides a strong cushion as shares appear to be fairly valued at the moment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.