The merger of two of the largest U.S. pipeline companies could create a heavyweight able to finance needed pipeline infrastructure, says Fadel Gheit, a senior oil-and-gas analyst with New York City-based Oppenheimer & Co.
“I think it will create long-term projects and make investments where [they are] needed,” Gheit says of the proposed merger between Kinder Morgan Inc. and El Paso Corp., announced on Oct. 16. Both firms are headquartered in Houston. “We don't have enough pipeline to take gas where it is used,” Gheit says, a situation that has existed in the pipeline sector for decades.
For now, though, both El Paso and Kinder Morgan say their existing pipeline projects are on schedule. “Everything we're doing, we're still doing,” says Joe Hollier, a spokesman for Kinder Morgan. One of Kinder Morgan's major projects is the expansion of a natural-gas pipeline running from Louisiana to Mississippi.
El Paso is pursuing natural-gas pipeline expansions in the Northeast, including an expansion of its Tennessee Gas Pipeline, a 128-mile project that is now under construction. It is expected to be in service in November, before the proposed merger's expected closure in the second quarter of 2012, says Richard Wheatley, an El Paso spokesman. Hollier said transition teams are being created to determine strategies, such as how the combined company will pursue new projects.
Together, the new entity would own 80,000 miles of pipeline—67,000 miles of the total is dedicated to natural gas—and about two-thirds of that portion is El Paso's. Kinder Morgan is purchasing El Paso for $38 billion, and the combined company will be worth $94 billion.
“We believe that natural gas is going to play an increasingly integral role in North America,” Richard Kinder, CEO and chairman of Kinder Morgan, said in a statement.
The combined company will be stable enough to embark on capital-intensive, cross-country pipelines, and it will have the trust of producers, Gheit says. Until now, there has not been a large company, such as ExxonMobil, in the pipeline business willing to make such investments.
Brad Olsen, an equity analyst for Houston-based Tudor Pickering Holt, says the companies have some overlapping assets in the Rockies that might need to be sold before the merger can gain regulatory approval. Olsen also sees a logical compatibility in the deal. For instance, El Paso has strong interests in the Northeast and the Southeast, places where Kinder Morgan has little pipeline.
Olsen says he does not expect similar mergers to follow. Gas pipelines are relatively expensive, and it is only Kinder Morgan's financial structure that has allowed it to take on the expensive El Paso acquisition, he says.
For the nation's pipeline infrastructure, the merger, if approved, is a “very, very, very, very big step in the right direction,” says Gheit.