Enterprise Products Partners LP (EPD) effectively found its down payment for its recently acquired Eagle Ford Shale Midstream assets, saying that it will sell its Gulf of Mexico (GoM) pipelines, platforms and services to Genesis Energy LP (GEL).

On July 8, Houston’s Enterprise closed on its $2.15 billion purchase of Pioneer Natural Resource Co.’s (PXD) EFS Midstream LLC, which includes 460 miles of natural gas pipelines, 10 central gathering plants and other facilities.

The Gulf acquisition is divided into two payments, the first for $1.15 billion and the second installed for $1 billion within 12 months. On July 16, Enterprise, an MLP, said it entered an agreement to sell its GoM pipelines and service businesses business to Genesis Energy for about $1.5 billion in cash.

Enterprise sold six offshore hub platforms, ownership interest in nine crude oil pipeline systems consisting of more than 1,100 miles and nine gas pipeline systems totaling about 1,200 miles. 

“The proceeds from this sale will effectively provide funds to finance the first installment of our recent acquisition of EFS Midstream LLC in the Eagle Ford,” said Michael A. Creel, CEO for Enterprise’s general partner.

The sale also eliminates any need for equity capital for the remainder of 2015, Creel said. The company nevertheless already had plenty of liquidity—about $4.3 billion, including unrestricted cash on hand and borrowings under a $3.5 billion, multiyear revolving credit facility and $1.5 billion in a 364-day credit facility as of July 8.

Tudor, Pickering, Holt & Co. said the deal metrics “aren’t great at TPHe 7.5x 2016 EBITDA” since Enterprise trades at 14x, but that dilution from the sale would be minor relative size to the partnership’s enterprise value.

Jeff Birnbaum, MLP analyst, Wunderlich, said Enterprise’s GoM sale is a surprise but headed to its natural buyer. Enterprise’s offshore business has clearly not been a focus for it since the Macondo oil spill.

In the past several years, earnings from Enterprise’s offshore business made up just 3% on Enterprise’s gross operating margin in the 12 months ending March 31, and its offshore assets do not effectively integrate with the company’s downstream crude oil and natural gas pipeline systems.  

“The only material investment it has made in the segment in recent years was for its 50% interest in the Southeast Keathley Canyon Oil Pipeline System (SEKCO), which came online last year, and of which Genesis Energy owns the remaining 50%,” Birnbaum said.

Genesis Energy has a large midstream presence in the GoM, including interests in many of the same crude pipelines. Overall, the assets are a mix of crude and natural gas pipelines that increase Genesis’ interest in the Poseidon Oil Pipeline System from 28% to 64% and interest in the SEKCO and Cameron Highway Oil Pipeline System (CHOPS) from 50% to 100%.

“The assets are a better fit for GEL’s asset portfolio and the sale will allow EPD to focus on its integrated onshore midstream and downstream businesses,” said Mark Reichman, director of research at Simmons & Co. International.

Enterprise expects to record non-cash asset impairment and related charges of about $100 million, or $0.05 per common unit on a fully-diluted basis in connection with the sale of its offshore GoM pipelines and services business.

Since the assets were viewed as held-for-sale at June 30, the non-cash charges will be reflected in Enterprise’s consolidated results for the three and six months ended June 30, the MLP said.

Connections:

  • Connected to U.S. major shale basins;
  • Connected to every U.S. ethylene cracker;
  • Connected to about 90% of refineries East of Rockies;
  • Pipeline connected to 22 Gulf Coast polymer grade propylene (PGP) customers; and
  • Connected to the “first and last mile” for supplies and markets through extensive marine and trucking fleets.

Birnbaum said that given the small percentage of total cash flows that Enterprise’s offshore represented and less need for financing in the second half of 2015, distributions should see a limited impact from the sale, with coverage likely remaining around 1.25x-1.3x post-sale.

“However, with first-quarter 2015 reported leverage of 3.9x after EPD's acquisition of Oiltanking, the deal should allow it to continue to be aggressive, pursuing new growth projects and M&A in a rapidly consolidating midstream environment,” Birnbaum said.

Contact the author, Darren Barbee, at dbarbee@hartenergy.com.