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ARC has blogged previously about its expectation that M&A activity in upstream oil & gas might accelerate as oil prices stabilize and companies begin to see the light at the end of the tunnel. Apparently the downturn in oil prices has been steep enough and long enough to make its impact felt in the midstream segment. Two pipeline companies agreed on Tuesday to merge in a deal that could create the largest energy-infrastructure company in North America, and one of the largest globally. The companies, Enbridge and Spectra Energy, signed a stock-for-stock deal, where Enbridge shareholders will own about 57 percent of the combined company and Spectra?s will own 43 percent, according to a statement released by the companies on Tuesday.
The merger, which valued Spectra Energy common stock at $28 billion, is expected to close first-quarter 2017, subject to shareholder and regulatory approvals and other customary conditions. The combined companies will possess a pro-forma enterprise value of roughly $127 billion. Spectra shareholders will receive 0.984 shares of the combined company for each share of Spectra Energy common stock they own. The consideration to be received by Spectra Energy shareholders is valued at $40.33/share of Spectra Energy, based on the Sept. 2 closing price of Enbridge common shares, representing an 11.5% premium to the closing price of Spectra Energy common stock
This combination brings together two highly complementary platforms and meaningfully enhances customer optionality. With an asset base that includes a diverse set of best-in-class assets comprised of crude oil, liquids and natural gas pipelines, terminal and midstream operations, a regulated utility portfolio and renewable power generation, the combined company will be positioned to provide integrated services and first and last mile connectivity to key supply basins and demand markets.
Pipeline companies help transport oil, natural gas and other liquids across the country. Pipeline companies had traditionally been seen as an energy investment relatively immune from the price swings of the commodities they carry because they lock in long-term contracts. But after a plummet in energy prices last year, investors became skittish about pipelines as well because many of their customers were on the brink of bankruptcy.
The pipeline industry?s stock prices have been recovering, but the ability to combine gives these companies the chance to bulk up and diversify their offerings. Enbridge and Spectra will also have a utility portfolio and midstream energy business after they combine. Their customer base is largely low
The companies are expecting to save about $415 million in costs, most of which will be achieved toward the end of 2018. Enbridge said it would divest $2 billion of noncore assets over the next 12 months to improve its balance sheet.
Enbridge has a number of expansion projects currently under way, including a share of the Bakken Pipeline crude project. Spectra?s current projects include its 2.5-bcfd Infraestructura Marina del Golfo natural gas pipeline joint venture with TransCanada to ship gas into Mexico.