Back in 2012, Kinder Morgan Energy Partners (NYSE: KMP ) sold its stake in the backbone of Canada-U.S. crude oil transport: the Express-Platte Pipeline. The Express-Platte system runs from Hardisty, Alberta, the heart of the oil sands, to the Wood River Illinois refinery complex. Kinder Morgan had only a partial interest in the pipeline and wanted to reallocate assets into something over which it would have more control.
The buyer of Kinder Morgan's interest was a smaller pipeline partnership which had interests in Western Canada and a pipeline network from the traditional supply area of natural gas, the Gulf Coast, to the traditional demand area, New England. That partnership was Spectra Energy Partners (NYSE: SEP ) , and its acquisition in the Express-Platte interest was transforming.
Spectra now has multiple growth assets and two strategically important 'backbone' pipelines in its portfolio, making it one of the premium asset holders among pipeline partnerships. This article will look at Spectra's growth prospects and its valuation.
Dry gas shakeup
Spectra's single biggest natural gas transport asset is its pipeline from the Gulf Coast into New England. Traditionally New England has been the biggest consumer of natural gas in the country, and the Gulf Coast has been the biggest supplier. However, with the discovery and development of the Marcellus shale, a 'mega-shale' in Pennsylvania with perhaps a century's supply of natural gas, that supply dynamic is changing rapidly.
In the future, New England, and ultimately even the Gulf Coast region, will get much of its gas from the Marcellus shale. The demand dynamic is changing as well. With natural gas so inexpensive, many homes in the Northeast are switching from oil heating to gas heating, which is further increasing demand for natural gas. On the Gulf Coast, more natural gas is also needed thanks to a build-out of industrial capacity.
Spectra is well out ahead of both trends, with more than $4 billion in plans for bi-directional pipelines from the Marcellus to New England, the Gulf Coast, and even the Midwest. The last of these projects will come online in 2017.
Overall, the market for oil and natural gas liquids in North America is very dislocated. Due to inadequate infrastructure, going oil prices in Canada and the Bakken are significantly lower than those of the rest of the country. West Texas Intermediate is also at a significant discount to Brent Crude. This all works in the favor of pipelines, which serve to transport liquids from one place to another.
To the surprise of few, capacity in the Express-Platte pipeline system is completely sold out for 2014. This Hardesty-Wood River pipeline carries crude oil from the oil sands and Bakken, both of which trade at a significant discount. In addition to Express-Platte, Spectra has capital spending plans of $10 billion in liquids transportation projects in North America.
This is a big game-changer and will provide steady growth for years to come. For example, earnings before interest, taxes, depreciation, and amortization from all liquids transportation is expected to grow by 32%, compounded until 2016 at the earliest. Of that 32%, 19% will come from Express-Platte alone.
Spectra Energy Partners plans to grow EBITDA earnings by 11% this year and an 8%-9% compounded growth rate after that until 2016 at the earliest. The partnership's distributable cash flow sits at a fantastic 1.4 times distributions, making Spectra one of the most well-covered partnerships there is. With 'backbone' assets, solid growth, and a very well covered dividend, Spectra is one of the top-tier partnerships right now.
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