Unlike Canadian oil sands crude, cash is flowing quite well across the border into the U.S.
The investment of $1.438 billion by the Ontario Municipal Employees Retirement System (OMERS) for a 50% stake in the BridgeTex Pipeline Co. LLC is the third major investment in U.S. energy assets this year. Other deals include the purchase of wind power owner and operator Leeward Renewable Energy LLC in March; and the announcement earlier in August of the acquisition of a 24% stake in Puget Holdings LLC, owner of Puget Sound Energy, a large electric and natural gas provider in western Washington State.
The strategy makes sense for organizations like OMERS.
“The risk profile of a proven U.S. pipeline asset with a likelihood of strong long-term utilization is ideally suited for retirement funds like OMERS,” Greg Haas, director for integrated energy research at Stratas Advisors, told Hart Energy. “For fiduciary funds such as this, rateable cash flows are always preferred to more volatile returns of other types of investment vehicles.”
The transaction, announced Aug. 21, gives OMERS a 30% interest from Plains All American Pipeline LP (NYSE: PAA) and 20% interest from Magellan Midstream Partners LP (NYSE: MMP), with the sellers receiving proportionate shares of the purchase price. That will result in OMERS owning 50% of the pipeline; Plains, 20%; and pipeline operator Magellan, 30%.
“We’re excited to enter into this joint venture with Plains All American and Magellan, consistent with our strategy to build long-term investment partnerships with leading corporations,” Michael Ryder, senior managing director, Americas for OMERS Infrastructure, said in a statement announcing the purchase. “The addition of BridgeTex marks our re-entry into the U.S. midstream sector and is a welcome addition to our high-quality infrastructure portfolio.”
The deal is expected to close in fourth-quarter 2018. Barclays served as financial adviser for Plains, and Jefferies advised OMERS. Legal advisers included Vinson & Elkins LLP for Plains, GableGotwals for Magellan and Sidley Austin LLP for OMERS. Sidley’s team included Cliff W. Vrielink, Christopher M. Barbuto, Chris Folmsbee, Cedric E. Seley III, Angela T. Richards, William A. Williams and Gregory M. Kusel.
Crude oil volume on BridgeTex, which connects Colorado City in West Texas to terminals on the Texas Gulf Coast in the Houston area, leaped from an average 240,000 barrels per day (Mbbl/d) in second-quarter 2017 to 390 Mbbl/d in second-quarter 2018. Aaron Milford, Magellan’s CFO, said during the company’s recent earnings conference call that the company was projecting an average for the year of 370 Mbbl/d, an increase of 20 Mbbl/d over its previous guidance.
Plains and Magellan launched an open season in early July to gauge interest in a capacity expansion to 440 Mbbl/d. That expansion is expected to be completed by early 2019 and would put BridgeTex close to the 450-Mbbl/d capacity of Enterprise Products Partners LP’s (NYSE: EPD) Midland, Texas-to-Sealy, Texas pipeline, which also connects the Permian Basin to the coast, in this case the ECHO terminal in Houston, with capacity of 6.4 million barrels.
The cash could come in handy.
“Plains and Magellan can deploy the cash infusion into further expansion that serves the burgeoning output from West Texas,” Haas said.
Plains has completed several debottlenecking projects to smooth transport of crude oil from the Permian Basin and added $650 million to its 2018-2019 capital program for a total of $2.6 billion.
“We continue to expect the capital program to be principally funded with retained cash flow and asset sales,” Al Swanson, Plains executive vice president and CFO, said on the company’s second-quarter earnings conference call.
Magellan is looking to spend about $2 billion on new projects between 2018 and year-end 2020, including an expansion of its Seabrook, Texas, logistics terminal to be able to handle Suezmax tankers.
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