Editor’s note: This story was updated at 8:12 a.m. CT on Aug. 22 to correct transaction value in headline.
Phillips 66 Co. offered to acquire the remaining stake in DCP Midstream LP in a cash buyout on Aug. 17 that values the pipeline operator at $7.2 billion.
Headquartered in Denver, DCP Midstream is one of the largest producers of NGL and processors of natural gas in the U.S. The company operates as a 50:50 joint venture (JV) between Phillips 66 and Enbridge Inc. Berkshire Hathaway owns some 9.8% of Phillips 66 shares, totaling 46 million. Additional owners of more than 5% of shares are The Vanguard Group (6.8%) and BlackRock Inc. (5.9%), according to a filing with the U.S. Securities and Exchange Commission.
“Phillips 66 is proposing consideration of $34.75 for each outstanding publicly-held common unit of DCP Midstream as part of a transaction that would be structured as a merger of DCP Midstream with an indirect subsidiary of Phillips 66 with DCP Midstream as the surviving entity,” Phillips 66 said in a company release.
The transaction, which Enbridge called a “joint venture merger” in a separate release, will result in a single JV holding both Enbridge’s and Phillips 66’s indirect ownership interests in Gray Oak Pipeline LLC and DCP Midstream plus an agreement to realign their respective economic and governance interests in the underlying business operations.
Enbridge said it received a $400 million cash payment from Phillips 66 as part of the deal. Proceeds will be used to “create additional financial flexibility and further the company’s capital allocation priorities,” according to the company release.
Backing out the $400 million cash transfer, analysts with Tudor, Pickering, Holt & Co. (TPH) estimate that the remaining $690 million of value attributable to Gray Oak points to a gross valuation of $3.29 billion, including the $1.36 billion of asset-level debt. This stands at a modest premium to construction costs of roughly $2.7 billion and implies an EBITDA multiple of TPHe 9.7x on a run-rate of about $85 million quarter recently reported by the Federal Energy Regulatory Commission.
“Transaction fits with ENB CN’s efforts to grow their Gulf Coast crude oil footprint at a reasonable valuation with potential expansion opportunities down the road from an integrated system,” TPH analyst Colton Bean wrote in an Aug. 18 research note.
As part of the transaction, Enbridge will reduce its stake in DCP Midstream to 13.2% from 28.3%. In turn, Enbridge will take over as operator and more than double its stake in Grey Oak pipeline, which transports crude oil from the Permian Basin into Corpus Christi and the Houston area.
Previously operator of Gray Oak, Phillips 66’s economic interest in the long-haul pipeline will fall to 6.5% from 42.25%. Meanwhile, Enbridge will increase its indirect economic interest in Gray Oak to 58.5% from 22.8%.
“We’re pleased to have reached this new arrangement with P66 to optimize the combined assets and drive operational and financial synergies from both assets,” commented Al Monaco, president and CEO of Enbridge. “It’s another example of our continued focus on optimizing our portfolio and surfacing value for our shareholders, while further building out our already strong U.S. Gulf Coast export position.”
Gray Oak Pipeline, in combination with Enbridge’s Ingleside Energy Center (EIEC), provides an industry-leading solution to deliver low-cost, long-lived Permian Basin oil to local Gulf Coast and global export markets, according to the Enbridge release.
The EIEC currently loads nearly 30% of North American oil exports. Through 2030, Enbridge anticipates that Permian oil supply will grow by an estimated 2 million bbl/d, enhancing Gray Oak’s utilization and driving increased oil exports off the Gulf Coast.
Further integration of Gray Oak and the EIEC is expected to support the development of new commercial solutions and future growth potential, unlocking additional value for Enbridge’s customers, the company said.
Enbridge added that it also intends to extend its solar self-power strategy by working with the other Gray Oak owners to develop solar facilities along the Gray Oak right-of-way in support of the company’s net-zero emissions targets, and those of its customers'.
“We look forward to continuing our strong partnership with P66,” Monaco added in the release.
The transaction was entered into and closed on Aug. 17, according to a Phillips 66 investor presentation.
Citi was financial adviser to Enbridge and Vinson & Elkins acted as its legal counsel. Phillips 66 engaged Barclay’s Capital Inc. as financial advisor and Bracewell LLP as legal counsel.
Gibson, Dunn & Crutcher LLP advised Phillips 66 as special tax counsel on the realignment of its economic and governance interests in DCP Midstream and Gray Oak Pipeline through the merger of existing JVs owned with Enbridge. The Gibson Dunn tax team was led by partner Eric Sloan and included of counsel Jennifer Sabin and associates James Jennings and Adam Gregory.
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