They have $37B to buy Spectra. $400M is basically bus fare.
The $37-billion deal between Canada’s Enbridge Inc. and Houston-based Spectra Energy Corp. will create North America’s largest energy infrastructure company, an entity almost perfectly diversified between the transport of oil and natural gas.
One of the largest-ever Canadian takeovers, Spectra’s natural gas pipeline assets that stretch from British Columbia to the Gulf of Mexico will give Calgary-based Enbridge a path to its long-stated goal of bringing more balance to a business that has been heavily weighted to moving crude.
As upheaval in global energy industries continues, the scale of what will be Canada’s fourth-largest company by market capitalization will mitigate exposure to industry downturns, Enbridge chief executive officer Al Monaco said. If approved by Canadian and U.S. regulators, the massive new company will control just more than 30,000 kilometres each of oil and long-haul natural gas pipelines to transport plentiful North American supplies through a continental web of pipeline networks.
“We’ve always thought this was a pretty good fit,” said Mr. Monaco, who will be the president and CEO of the new company.
“We both came to the conclusion that we’re so strong today, and that’s probably the best time when you should be looking at opportunities to reposition for the future,” he said in an interview, calling the two firms’ oil and natural gas pipelines assets “the crown jewels of both of our companies.”
Enbridge always had some exposure to natural gas shipping, and Spectra dabbled in moving oil sands crude through its Express pipeline from Alberta to Wyoming. But National Bank Financial said Tuesday’s deal blends the two companies so that the new Enbridge’s business interests will be 49-per-cent liquids-focused, 47-per-cent natural gas and 4-per-cent power.
Tuesday’s announcement pegged the enterprise value of the joint entity at about $165-billion, with an asset base that also includes terminal, storage and other midstream operations, utilities in Ontario and renewable energy. The deal still requires approvals from U.S. antitrust and security regulators, as well as a sign-off through the Canada’s Competition Act, according to the companies.
The all-stock transaction values Spectra at about $37-billion based on the closing price of Enbridge’s common shares on Friday. The deal is expected to result in $540-million in cost savings by late 2018. It also sees Enbridge assume approximately $22-billion of Spectra debt, with a focus on debt reduction in the next few years. Executives said they plan to sell $2-billion of non-core assets over the first year, and had identified up to another $6-billion of potential sales.
The name of the combined entity will be Enbridge Inc. and the head office will be in Calgary, with the natural gas business located in Houston. The Canadian-born Spectra president and CEO Greg Ebel will become non-executive chairman of Enbridge. Mr. Ebel said no one was pushed to make the deal. “This sure wasn’t about need. It’s about strength and strength.”
For Enbridge’s many dividend-minded investors, the companies were careful to ensure “a highly visible dividend growth rate” of 10 to 12 per cent through 2024, after a projected increase of 15 per cent in 2017.
While both Enbridge and Spectra have managed to maintain profits, some of their customers haven’t been as fortunate. Global oil producers have been hammered by a dramatic drop in crude prices over the past two years.
Although Canadian oil production is still set to grow in the years ahead, low commodity prices and limited pipeline access to international markets has stymied the construction of new bitumen production projects in the post-2017 era. Earlier this year, Enbridge executives said they are focused on setting up an inventory of income streams that aren’t reliant on the oil sands post-2019, including natural gas and renewable-energy projects. At the same time, it revised its dividend-increase forecast.
But Enbridge will, by far, still continue to transport the lion’s share of oil from Western Canada.
The financial health of producer customers aren’t the only headwinds for pipeline companies. In recent years, they have faced a strong public and political backlash to new projects as environmental and First Nation concerns play an increasingly important role in North American infrastructure development. The scrutiny has meant more stringent regulatory constraints, resulting in delays and uncertainty over some major pipeline projects.
For instance, Enbridge’s controversial $7.9-billion Northern Gateway project was dealt another blow in June when the Federal Court of Appeal quashed the permit issued by the federal cabinet two years ago because Ottawa failed in its duty to consult First Nations. The federal government must give its response to the decision by Sept. 22.
Although the prospect of $26-billion in secured capital growth was highlighted in Tuesday’s announcement, the two chief executives acknowledged that in-the-ground assets are irreplaceable in such a climate. Acquiring existing assets has been a key strategy as of late, with competitor TransCanada Corp. buying Houston-based Columbia Pipeline Group Inc. for $10.2-billion (U.S.) this year to give the Calgary company a significant position in a massive shale gas region in the U.S. Northeast.
Izabel Flis, an analyst at Franklin Bissett Investment Management, which has Enbridge shares in various funds, said concerns about a decline in future project opportunities may have played into the deal making.
“Some of the entities out there, the energy infrastructure names, have been struggling for sizable organic growth. I would say both of these entities still had a pretty good runway of opportunities, some secured and some what they call risked,” Ms. Flis said.
“But I wonder if to some degree that might have had an influence – where those opportunities are potentially on a decline, just given the commodity price environment over all.”
Terms of the agreement announced Tuesday call for Spectra shareholders to receive 0.984 shares of the combined company for each Spectra share. That values the deal at $40.33 (U.S.) per Spectra share, an 11.5-per-cent premium to Spectra’s closing price on Friday.
Enbridge shareholders will own about 57 per cent of the new company while Spectra investors will have about 43 per cent.
Annual revenue on a combined basis would be about $40-billion (Canadian), with earnings before interest and taxes (EBIT) of $5.8-billion. Subject to a shareholder vote, the deal is expected to close in the first quarter of 2017.
