Continental Resources (NYSE:CLR) CEO Harold Hamm found himself a bit short on cash after his ex-wife cashed the nearly $1 billion check he sent her in hopes of settling their highly contested divorce. So, instead of selling any of his more than two-thirds stake in oil giant Continental Resources to cover his obligations, he sold his oil pipeline company Hiland Partners. He was able to get $3 billion for the business from pipeline company Kinder Morgan (NYSE:KMI), which is a good thing -- he might need that money too, considering his ex-wife has vowed to proceed with her appeal as she seeks more of Hamm's oil-fueled fortunes.
Details on the deal
What's worth noting about Hiland Partners is the fact that Hamm, along with certain family trusts, owns the business, instead of Continental Resources. Continental Resources is in fact a customer of Hiland, along with several other notable oil companies in the Bakken region. This arrangement isn't all that uncommon in the energy industry as energy executives engage in related party transactions like this all the time. In this case, Hamm saw a need for oil gathering services in the Bakken and used his own money to start a company that would provide those services to Continental and its competitors.
He built quite a strong platform, as Hiland owns a composite of 3,000 miles of oil and gas gathering pipelines in North Dakota and Montana. Overall, 1.8 million acres are dedicated to the platform under long-term, fee-based arrangements. In addition to that, the company is in the final stages of constructing the Double H Pipeline, which is a 485-mile pipeline that will transport crude oil from the Bakken to an interstate pipeline that will send it to America's crude oil hub in Cushing, Oklahoma. This pipeline is one of the reasons some Bakken producers, Hamm's Continental Resources included, have said they don't need the Keystone XL pipeline, as Double H's 108,000 barrel per day capacity is as much capacity as Bakken producers would have had on that controversial pipeline.
Needless to say, these are critical infrastructure assets, and the fee-based nature of the contracts is why Kinder Morgan is willing to fork over $3 billion to buy one of the premier midstream operators in the Bakken. That's actually a pretty penny for the business, as Kinder Morgan is paying 10 times 2018 EBITDA for the asset. Typically, midstream assets go for 9-12 times current EBITDA. However, Kinder Morgan sees the business modestly boosting its cash available to pay distributions over the next two years before ramping up by 2017. That built-in growth is nice to have, especially considering the fact that Kinder Morgan is focused on growing its dividends by about 10% per year through the end of the decade.
Why Hamm is cashing out
It's a business Harold Hamm likely would have loved to keep. However, most of his net worth is tied up in his Continental Resources stock, which limits his options to finance his divorce settlement. Because of that, he needed to take out a personal loan to pay his ex-wife the nearly billion dollars ordered by the court. However, according to Reuters he's had to post 18% of his stock, currently worth around $2.6 billion, as collateral for the loan, and could be forced to post more stock if its value continues to plunge. This was a growing risk to the company's other shareholders, which is acting as an overhang on the stock as investors worry that Hamm could lose these shares if oil prices keep falling and the stock could be sold at depressed prices to cover the loan.
By cashing in on his pipeline business Hamm frees up a bit more cash. He could use the cash to pay back the loan, or at least reduce the amount of Continental Resources stock being used as collateral. If nothing else, it gives him, and Continental Resources investors, a little breathing room.
Hamm is selling his pipeline business for a very lucrative amount. He received what appears to be top value for the assets despite the weak oil prices environment. That said, the fee-based nature of the business is a big draw for Kinder Morgan, which is always looking to expand its empire by acquiring contractually secured assets that come with built-in growth.
Matt DiLallo has the following options: short January 2016 $32.5 puts on Kinder Morgan and long January 2016 $32.5 calls on Kinder Morgan because he likes the fact that options gives him options. The Motley Fool recommends Kinder Morgan. The Motley Fool owns shares of Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.