Kinder Morgan Makes Deeper Inroads Into Shale Plays With Copano Energy Acquisition

Kinder Morgan Energy Partners (NYSE:KMP) announced that it will be acquiring natural gas pipeline operator Copano Energy LLC (NASDAQ:CPNO) in an all-stock deal valued at around $5 billion, including the assumption of debt. ^[1] We believe that the deal is likely to be beneficial to KMP since it gives the firm access to gas gathering, processing and transmission infrastructure at key shale gas basins in Texas, Oklahoma and Wyoming and also complements the firm’s existing transmission and storage business.

Details Of The Transaction And Copano’s Operations

Under the terms of the agreement, the company will offer 0.4563 share for each share of Copano, which translates to a price of around $41 for each Copano share, a 23.5% premium to Tuesday’s closing price. While the boards of both firms have approved the transaction, it will be subject to regulatory approval and a vote from Copano’s shareholders.

Copano provides comprehensive services to natural gas producers including gas gathering, processing, treating and natural gas liquids fractionation. Copano owns interests in or operates around 6,900 miles of pipelines which are capable of transporting around 2.7 billion cubic feet per day of natural gas and also owns 9 processing plants with significant processing and treating capacity. ^[1] In 2011, the firm had revenues of around $13.5 billion. Like KMP, Copano’s business model is also largely fee-based. Most of its revenues are tied to the volumes of the commodities that it processes and carries rather than directly linked to the prices of the commodities.

How Kinder Morgan Benefits From The Deal

Demand for natural gas is set to rise in the U.S. as power plants and the industrial sector increase their consumption of the fuel. According to the EIA, natural gas production is the United States is expected to rise from 23 trillion cubic feet in 2011 to around 33.1 trillion cubic feet by 2040 (a 44% increase).  Almost all of the increase in domestic natural gas production is expected to come from shale gas, a resource which has seen its output rise rapidly as technologies like hydraulic fracturing have made it viable to exploit the resources relativity economically. Shale gas already contributes to around 35% of U.S. dry gas production and is becoming a mainstay in the U.S. energy landscape. ((Shale Gas, EIA))

The acquisition will allow KMP to expand its footprint and increase capacity in some of the largest shale gas plays in North America. Through the acquisition, KMP will expand its presence in the Eagle Ford shale in Texas, which is considered to be one of the most promising shales in North America due to its rising high quality output and proximity to key markets. KMP was already in a joint venture with Copano for gas gathering in the Eagle Ford shale, and will now become the sole owner of this operation. The firm will also gain access to operations in Barnett Shale in North Texas, which is one of the largest shale basins in North America (in terms of production). Besides this, the firm will also get access to the Mississippi Lime and Woodford shales in Oklahoma. Additionally, KMP can also benefit from Copano’s capacity expansion projects for which it already has customer commitments.

Copano provides services to natural gas producers including processing, treating and natural gas liquids fractionation, and this is likely to complement KMP’s existing natural gas pipelines business.  The acquisition should help KMP increase revenues and shipping volumes of its natural gas pipelines division.

Building new pipeline infrastructure is time consuming and involves a lot of uncertainty due to regulatory approvals and scrutiny from environmental groups. Due to this, it makes sense for firms to acquire pipelines in order to quickly scale up their capacity. KMP along with its parent company Kinder Morgan Inc. (NYSE:KMI) has been on an acquisition spree over the past few years, capitalizing on the boom in energy production in the U.S.  KMI acquired the El Paso Corporation and sold a 50 percent stake in El Paso Natural Gas pipeline and the Tennessee Gas Pipelines to KMP to gain regulatory approval last year. The natural gas pipelines business put up a strong performance in 2012, with net income from the division growing by nearly 40% last year thanks to these acquisitions.

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1. KMP Press Release [↩] [↩]