The recently announced $38 billion acquisition of El Paso Corporation by Kinder Morgan, Inc. reflects yet another huge bet on the role of natural gas in America’s energy future, and a major move forward in the much needed consolidation of the natural gas pipeline business in the U.S. It also appears likely to trigger more M&A activity in the sector.
Interest and investment in natural gas assets remains high, notwithstanding continued weakness in natural gas prices. Even with prices hovering below $4 per million British thermal units (which, depending on which sources you believe, is about half of the break-even development costs), M&A activity for natural gas assets remains active. Based on published reports, half of the ten largest energy deals announced in the third quarter of 2011 involved shale gas plays.
Over the past five years, many of the most significant shale plays involved acquisitions of upstream assets led by oil and gas companies and, to a lesser extent, private equity funds. More recently, however, attention has turned to the pipelines.
The Kinder Morgan/El Paso deal comes on the heels of a bidding war for Southern Union Company, which was waged over the summer and won by Energy Transfer Equity, L.P. in a deal valued at approximately $2.9 billion. Interestingly, it is also the largest U.S. energy deal announced since ExxonMobil’s $41 billion purchase of XTO Energy in 2009. Much like that transaction, the Kinder Morgan/El Paso transaction marks a considerable increase in the stakes being wagered on the growth of natural gas as a long-term energy source in the U.S. It also raises the stakes for other pipeline developers.
Even before the shale gas revolution, the natural gas pipeline business in the U.S. developed in a highly fragmented manner. While some consolidation has occurred, there is still a large number of pipeline companies that participate in that market. The rapid expansion of shale gas reserves has not only increased the need for vastly expanded capacity, it has also contributed to the fragmented development of this country’s pipeline “network.”
With natural gas prices at the current low levels, the pipeline business is now facing some of the same issues that are driving consolidation among the owners of upstream shale assets. Many of the smaller pipeline developers are capital constrained and are looking for outside capital to help fund the massive amount of development required. In addition, faced with the prospect of low natural gas prices for an extended period, producers and other energy companies with pipeline assets may seek to shed those assets at attractive prices.
Some industry analysts have commented that Williams Companies, having lost the deal for Southern Union, as well as other large pipeline companies such as Oneok, Inc., Spectra Energy Corp. and others, are likely now to feel increased pressure to expand their networks. Foreign interest in the U.S. pipeline system is also likely to increase.
Following the announcement of the Kinder Morgan/El Paso transaction, Richard Kinder described the deal as a “once-in-a-lifetime opportunity” and was also quoted as saying that “[i]f you believe in the future of natural gas, you believe in putting together the biggest possible network.” The combination of the Kinder Morgan and El Paso networks is compelling and far-reaching, and is likely to lead to further consolidation as others try to put together networks to take advantage of natural gas’s future.
The views expressed in this article are those of the writer.