Enbridge Energy Partners (NYSE:EEP) and Marathon Petroleum (NYSE:MPC) announced in early August that they are forming a joint venture to acquire a minority interest of the Bakken Pipeline System. The $2 billion deal gives both companies the ability to transport oil from North Dakota to refineries in Texas. Here's a breakdown of what the deal entails and its potential impacts for long-term investors.
Enbridge Energy Partners -- a subsidiary of Enbridge Corporation -- and Marathon Petroleum paid $2 billion to acquire 49% of a holding company that owns 75% of the system. Phillips 66 owns the remaining 25%. Enbridge agreed to pay $1.5 billion, taking control of 27.6% of the system. Marathon paid the remaining $500 million for 9.2%.
The Bakken Pipeline System comprises the Dakota Access Pipeline and the Energy Transfer Crude Oil Pipeline. Together, the pipelines cover nearly 2,000 miles, connecting North Dakota energy production to Gulf Coast refineries. It can transport 470,000 barrels per day and can be expanded to 570,000 if demand increases.
In conjunction with the acquisition, Enbridge and Marathon agreed to cancel their transportation contract and venture relating to the Sandpiper Pipeline System. This is notable for a couple of reasons. First, Marathon had already invested over $300 million in Sandpiper, which would carry oil from North Dakota to Wisconsin. By pulling out of the venture, Marathon Petroleum is forfeiting its investment, but also reduces future capital expenditures. Second, Enbridge does not yet know if it will move forward with the project, but has left the option open in order to meet customer demand.
The decision to acquire an interest in the Bakken Pipeline system comes down to time and money. Buying into the Bakken Pipeline system cost the two companies $2 billion and is expected to come online in 2016. The Sandpiper Pipeline is expected to cost $2.6 billion and wouldn't come online until 2019 at the earliest.
Additionally, the Bakken Pipeline carries crude all the way to the Gulf Coast while Sandpiper would stop in Wisconsin.
By opting to purchase an interest in the pipeline that will come online three years prior to the Sandpiper system, both companies will see quicker returns on their investments and expedite strategic plans. For Enbridge, the deal extends its existing liquids pipelines into the eastern Gulf Coast, which it considers a priority. Adding the Bakken Pipeline strengthens the company's core industry, with its liquids segment responsible for the entirety of its operating income in the second quarter.
And for Marathon Petroleum, the deal increases its refinery supply flexibility and expands its midstream logistics business. In the second quarter, Marathon earned over $1 billion in income from its refining operations, but only $200 million from its midstream business, which includes its midstream MLP, MPLX.. Building its pipeline portfolio helps create a more balanced business model. Additionally, Marathon remains committed to its $2 billion investment through 2020 in its two south Texas refineries in order to significantly boost its Gulf Coast refining capacity. Having a pipeline that connects the Bakken region to the Gulf Coast -- as opposed to Wisconsin -- will potentially feed the refineries, which when complete will process 585,000 barrels of crude per day.
With the system coming online by the end of 2016, Enbridge and Marathon should begin to see returns shortly thereafter.
The Foolish bottom line
Enbridge Energy Partners and Marathon Petroleum had already formed joint ventures to increase access to Bakken crude oil, so the latest agreement shouldn't come as a big surprise. The deal will give them quicker access to the oil and connects them to Gulf Coast refineries, which offers increased flexibility and expands their potential customer base. While $2 billion is a large investment, access to the Bakken region should provide long-term returns. Investors should continue to monitor Enbridge's future guidance, as it very well could move forward with Sandpiper or find additional ways to add capacity.