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DTE investors unenthusiastic about Haynesville midstream acquisition

A DTE Energy Co. unit's agreement to buy gas gathering assets in Louisiana's Haynesville Shale for $2.25 billion received a tepid reaction from investors even as management reassured shareholders and analysts about the sellers' credit quality and the location.

Under the deal, DTE Midstream would acquire 100% of the assets from midstream company Momentum Midstream LLC and producer Indigo Natural Resources LLC, including an existing gathering system and a 150-mile gathering pipeline under construction. Upon the completion of the gathering pipeline, expected in the second half of 2020, DTE Midstream would make an additional $400 million milestone payment.

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"This investment … is an attractive asset with a strong underlying resource that is connected to a growing market, provides solid contracted cash flows and growth opportunities and is consistent with our longer-term investment strategy," DTE CEO and director Jerry Norcia said during an Oct. 18 conference call.

He cited proximity to the Henry Hub and a number of existing and planned LNG export facilities as key benefits of entering the Haynesville, which "has all of the fundamentals that we look for," including the ability to grow production even in a low gas price environment.

DTE's stock price, meanwhile, was down 1.7% at $127.30 per unit just after noon ET.

"The marginal investors in utility stocks seem to be a combination of global generalists and beaten-down energy investors," Scotia Capital (USA) Inc. analysts wrote in an Oct. 18 note to clients. "From our conversations, those funds seem to be far more interested in pure-play regulated utilities (like [CMS Energy Corp.]) rather than diversified companies with energy exposure (like [Dominion Energy Inc.]), hence the massive valuation gap between those stocks."

Responding to analysts' concerns about privately equity-backed Indigo's credit facilities, executives pointed to expectations that the producer will become cash flow positive in 2020 as well as collateral that DTE could call on if the company does not maintain its credit metric. S&P Global Ratings pegged Indigo at a B+, several notches below investment grade.

"We feel really good about the credit provisions in the agreement," Norcia said.

Analysts at Guggenheim Securities LLC wrote in an Oct. 18 note to clients that the deal "de-risks the capital plan for [the gas storage pipeline segment] ... and diversifies the geography and contract counterparties." Concerns about Antero Resources Corp.'s financial health are a negative for the Link gas gathering system DTE owns with the shale driller in Appalachia as Stonewall Gas Gathering LLC, the analysts added.

DTE increased its ownership in Stonewall earlier in 2019, reflecting the buying opportunities in the midstream market that Norcia noted on July 24 as some companies struggle under "severe" financial strain.

The utility, in partnership with Enbridge Inc., also owns the 1.5-Bcf/d Nexus Gas Transmission LLC pipeline that began moving Appalachian Basin gas to customers in the Midwest and Canada in October 2018.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.