While TransCanada Corp. may be the most plausible bidder for Kinder Morgan Inc.'s Trans Mountain oil pipeline system in western Canada, energy finance experts expect that private equity firms and pension funds will take a look at acquiring the asset.
Canadian pipeline companies TransCanada, Enbridge Inc. and Pembina Pipeline Corp. are the top prospective buyers for Trans Mountain because they have infrastructure that could be connected to the system and financial wherewithal to take on a large deal, according to CreditSights analyst Charles Johnston and East Daley Capital Advisors Inc. research director Rob Wilson. Enbridge's current focus on reducing leverage via asset sales and majority ownership of western Canadian crude oil takeaway capacity, however, reduce the likelihood of a bid, they said.
The Canadian government on May 29 announced an agreement to purchase the Trans Mountain oil sands system from Kinder Morgan subsidiary Kinder Morgan Canada Ltd. for C$4.5 billion amid a regulatory battle among British Columbia and Alberta provincial governments, the Kinder Morgan companies, and the federal government concerning the stalled C$7.4 billion expansion project. Once the transaction closes in the third or fourth quarter, the federal government committed to fund planning and construction work for the project, which would expand Trans Mountain's capacity to 890,000 barrels per day from 300,000 bbl/d, and the government will also work with Kinder Morgan Canada's board to find a third-party buyer.
Enbridge is in the process of shoring up its balance sheet through unloading assets worth C$10 billion and rolling up its midstream master limited partnerships. TransCanada, meanwhile, has cut its struggling MLP loose after the Federal Energy Regulatory Commission's March 15 tax ruling sent TC PipeLines LP share prices into a tailspin, reflecting the partnership’s significant exposure to cost-of-service rates.
East Daley's Wilson said that TransCanada currently owns 15% of western Canadian crude takeaway capacity and would only own 25% if the Keystone XL crude oil pipeline project moves forward. CreditSights’ Johnston emphasized that if the controversial pipeline project does not proceed, TransCanada could look to Trans Mountain as a replacement to satisfy investors' appetite for a steady revenue-generating project.
Pembina is another potential buyer because it has several interconnections in Edmonton, Alberta, with Trans Mountain’s existing system. It does not have the market capitalization of Enbridge or TransCanada, but could tap public markets for the expansion project now that it has merged with Veresen Inc.
"They have pretty strong equity multiple and could take some debt on to buy out the project if they needed to," Johnston said in an interview.
Johnston, Wilson and Wood Mackenzie Canadian oil and gas research manager Mark Oberstoetter also pointed to private equity firms and institutions like pension funds as other possible bidders. Private equity has flowed rapidly into the North American oil and gas pipeline sector, taking advantage of the prohibitively high cost of equity for public companies. Institutional money, meanwhile, has shown interest in Canadian oil sands transportation. In 2016, Devon Energy Corp. sold a 50% stake in its Asset pipeline to the Canada Pension Plan Investment Board-backed Wolf Midstream Inc. for C$1.4 billion.
Oberstoetter predicted that the Canadian government will own the Trans Mountain system through the expansion project’s construction period given that British Columbia has joined legal challenges to the federal government's approval of the line. "It's hard seeing anyone in the next month or two coming to take this," he said in an interview.
Others questioned whether the Canadian government’s promise to help Kinder Morgan find a buyer would ensure that the Trans Mountain expansion materializes. "While this latest development increases the odds TMX will eventually get done, we think litigation and protests will continue to haunt the project and it's too early to call it a sure shot," Height Capital Markets energy analyst Katie Bays wrote in a May 30 note to clients.
