In what's become a fast growing and consolidating industry, Phillips 66 Partners LP (PSXP - Get Report) and EnLink Midstream Partners LP (ENLK) announced after the markets closed Wednesday, Oct. 22, that they had bought assets from their affiliates in deals valued at $533 million.
Houston-based Phillips 66 Partners said it's acquiring two newly constructed crude oil rail-unloading facilities in Linden, N.J., and Ferndale, Wash., from Phillips 66 Co. (PSX - Get Report) , also of Houston, for $330 million and assets related to the Cross-Channel Connector Pipeline for $10 million. It said the price for the rail-unloading facilities works out to 10 times the next 12 months' forecast Ebitda.
Dallas-based EnLink Midstream Partners LP said it's buying equity interests in E2 Appalachian Compression LLC and E2 Energy Services LLC from EnLink Midstream LLC (ENLC - Get Report) , also of Dallas, for $193 million. The price includes a cash payment of $163 million and 1 million units. EnLink Midstream LLC expects to use most of the cash proceeds to repay indebtedness, noting that it's the first drop down as part of the partnership's strategic growth plan.
Phillips 66 Partners plans to finance the acquisition with borrowings under its $28 million revolving credit facility and by assuming a five-year, $244 million note payable to a Phillips 66 unit and issuing 1.06 million common units and 12,764 general partner units valued at $68 million. Phillips 66 Partners expects to close the deal in early December, when it will be immediately accretive to unitholders.
Companies in the energy industry, particularly in the transportation, processing and storage segments, have created master limited partnerships as a way to exit assets to raise money to expand, including through acquisitions, while continuing to benefit from the assets via distributions. MLP's don't pay corporate income tax, as they distribute all of their earnings to unitholders, and as separate publicly traded companies, they can tap the equity and debt markets independently for capital to expand.
There are at least 140 MLP's in the marketplace today, including recent initial public offerings by Dominion Midstream Partners LP, Cone Midstream Partners LP and JP Energy Partners LP. More are expected, including Shell Midstream Partners LP, Antero Midstream Partners LP, Hess Midstream Partners, Exmar Energy LP and Wexford Capital LP-backed Mammoth Energy Partners LP.
As a result of the proliferation, there has been a consolidation under way that has seen three multi-billion-dollar deals in the last three weeks. Those include QEP Resources Inc.'s (QEP) sale of midstream business to Tesoro Logistics LP (TLLP) for $2.5 billion in cash; Enterprise Products Partners LP (EPD) 's purchase of Oiltanking Partners LP (OILT) from Oiltanking GmbH's Oiltanking Holding Americans Inc. for $6 billion; and Atlas Energy LP's (ATLS) and Atlas Pipeline Partners LP's (APL) sale to Targa Resources Corp. (TRGP) and Targa Resources Partners LP (NGLS) for $7.7 billion. Last week also saw American Midstream Partners LP (AMID) buying Costar Midstream LLC from private equity firm Energy Spectrum Partners VI LP for $470 million.
But there have been some reversals to the MLP proliferation trend. In August, Kinder Morgan Inc. (KMI) said it would be bringing all of its publicly traded master limited partnerships back under one roof in a cash and stock deal valued at $70 billion.
Phillips 66 Partners chairman and CEO Greg Garland said in a statement that the acquisition of the logistics assets from Phillips 66 Co. will enhance the composition and geographic diversity of its portfolio. "These strategically positioned assets will allow us to deliver on our plans for achieving top-quartile distribution growth," he said.
Phillips 66 Partners said the assets include the Bayway rail-unloading facility within the Phillips 66 Bayway refinery, the Ferndale rail-unloading facility adjacent to the Phillips 66 Ferndale refinery and assets related to the Cross-Channel Connector Pipeline that transports refined products between the partnership's Pasadena terminal and Kinder Morgan's Pasadena terminal.
The partnership plans to use the Cross Channel assets to develop a new project to provide shippers access from its Pasadena terminal to third-party systems north of the Houston Ship Channel. It expects to spend $12.4 million on the project, a cost underwritten by long-term transportation service agreements with several shippers. The pipeline will have an initial capacity of up to 180,000 barrels per day and is expected to begin commercial operations in the second quarter of next year.
Phillips 66 Co. and the partnership will enter into 10-year terminal services agreements for all of the rail-unloading facilities' capacity.
Phillips 66 Partners' board approved the deal based on the recommendation of its conflicts committee, which is made up of independent directors.
Evercore Partners' Ray Strong, Eric Bauer, Ed Freydel and Zac Query advised the committee. Vinson & Elkins LLP provided legal counsel, including Alan Bogdanow, Michael Allers and Doug Smith on the corporate side along with Michael Holmes on litigation, Jim Meyer and Jim Penny on tax, Michael Boulden, Julie de Neufville and Karl Sigwarth on real estate, Brandon Tuck on environmental, Sabina Walia on regulatory and Gary Kotara and John Michael energy transactions/projects. Phillips 66 Co. was represented by Latham & Watkins LLP's Brett Braden and Thomas Brandt.
Simmons & Co. International wrote in a report Thursday that it thinks Phillips 66 Co. still has $400 million in Ebitda eligible to dropped into Phillips 66 Partners.
EnLink Midstream LP said the addition of the E2 assets builds on its strategy in the Utica and Marcellus shale plays to focus on stabilizing and transporting condensate via pipeline, rail, barge and trucking operations. The addition also builds on its platform in the region, where EnLink Midstream expects to have invested $700 million by the end of 2015.
The E2 assets are supported by a long-term, fee-based contract, including minimum volume commitments, with Antero Resources Corp. (AR), one of the most active drillers in the Utica and Marcellus region, EnLink Midstream LP said. Once all the E2 stabilization and compression facilities are complete in the first half of next year, EnLink Midstream expects them to generate $20 million to $25 million per year of adjusted Ebitda.
EnLink Midstream LLC CEO Barry Davis said in a statement that the company continues to make progress and enhance its position for substantial growth in the Utica and Marcellus shale plays and that its relationship with Antero is a key component of that growth, with additional opportunities in the region.
"Unitholders of ENLK and ENLC will continue to benefit from this and future drop down transactions, which is one of several strategies for growth," he said. "We expect additional drop downs of assets held by our general partner as well as assets held by our sponsor, Devon Energy Corp. These types of transactions support our ability to double the size of the company by 2017."
E2's assets include five condensate stabilization and natural gas compression stations with capacities of 19,000 barrels per day of condensate stabilization and 580 million cubic feet per day of natural gas compression. Three of the five stations are in service and commercial start-up of the other two is expected in the first half of next year.
By the end of 2015, EnLink Midstream LP's assets in the Ohio River Valley are expected to include 250 miles of crude and stabilized condensate pipelines, 11 condensate stabilization and gas compression stations with a capacity of 60,000 barrels per day of condensate and 1.2 billion cubic feet per day of natural gas compression, 110 trucks and rail and barge terminals.