ARKANSAS, Nov 07 (Future Headlines)- Kinder Morgan, a leading U.S. pipeline operator, has announced a significant acquisition, agreeing to purchase NextEra Energy Partners’ South Texas gas pipelines for $1.82 billion. This move reflects the ongoing consolidation within the oil and gas pipeline sector, driven by growing U.S. production and permitting challenges for new pipelines that have heightened the value of existing operators.

The oil and gas pipeline sector in the United States has been witnessing increased consolidation this year, reflecting the industry’s response to the growing production and the persistent challenges surrounding permits for new pipelines. The acquisition of NextEra Energy Partners’ (NEP) Texas natural gas pipeline portfolio, known as STX Midstream, by Kinder Morgan exemplifies this trend. The consolidation is driven by the need for efficiency and scale to meet the rising demand for energy transportation.

  • Details of the Acquisition

Kinder Morgan’s acquisition of NEP’s South Texas gas pipelines involves a purchase price of $1.82 billion. The Texas natural gas pipeline portfolio, STX Midstream, encompasses seven pipelines that serve as essential conduits for natural gas supply to Mexico and various power producers and municipalities in South Texas. In total, these pipelines have a significant transport capacity, capable of delivering 4.9 billion cubic feet of natural gas per day.

In a statement, Kinder Morgan indicated that the initial funding for this acquisition would be sourced from cash reserves and short-term borrowings. The deal is anticipated to be finalized during the first quarter of 2024.

The acquisition of NEP’s Texas gas pipeline assets aligns with Kinder Morgan’s strategy to expand its existing natural gas pipeline network. South Texas is a key region for energy transportation and supply, making this acquisition a strategic move for Kinder Morgan.

  • Factors Impacting NextEra Energy Partners

NextEra Energy Partners, a subsidiary of NextEra Energy, was created to acquire, manage, and own contracted energy projects. The company has faced challenges and a decline in its stock value, losing approximately 44% of its market value since September 27. The primary contributing factors to this decline include:

Distribution Growth Forecast: NEP reduced its distribution growth forecast through at least 2026, which had a negative impact on investor sentiment.

Higher Interest Rates: The environment of higher interest rates has led to increased project costs for NEP, affecting its growth outlook.

In a statement, John Ketchum, CEO of NextEra Energy Partners, indicated that the proceeds from the sale would be utilized to pay off the outstanding project-related debt. This aligns with the company’s strategic financial planning to maintain financial stability and repay debts.

  • Valuation of the Transaction

The sale price of $1.82 billion represents a multiple of about ten times the estimated adjusted core profit for the Texas natural gas pipeline portfolio in the calendar year 2023. This valuation reflects the strategic importance of these assets to Kinder Morgan, making it a worthwhile investment.

According to analysts at Guggenheim Securities, this valuation falls in line with recent trading multiples for midstream sector constituents. Additionally, the sale price is situated below certain transaction benchmarks. Despite the purchase price, the deal provides Kinder Morgan with increased flexibility in its credit metrics.

Reporting by Moe Khaled; Editing by Sarah White