A few weeks ago an energy distribution and transportation company called Enbridge Incorporated ENB disclosed that they had agreed to acquire Spectra Energy Corporation SE in an all-stock deal.
Why does this matter?
You own shares in Spectra Energy Corporation’s Master Limited Partnership (MLP) subsidiary Spectra Energy Partners SEP. According to the announcement, Spectra Energy Partners will continue on as a publicly traded partnership, so your shares will likely be unaffected by the acquisition. If this is the end of the story, we will happily remain unitholders (shareholders) in Spectra Energy Partners as they will remain, in our view, the best midstream MLP in the country.
One way your shares might be impacted in the future, however, is if Enbridge Incorporated and Spectra Energy Corporation decide to combine, or “roll up”, Spectra Energy Partners with Enbridge Incorporated’s two publicly traded Master Limited Partnerships. If this scenario were to come to fruition, it’s probable we would grudgingly sell or largely reduce your holding in Spectra Energy Partners as any combination would dilute their premium asset base and financial position. All in all, this type of transaction would be hugely beneficial for Enbridge’s MLP’s as they would effectively be “marrying into” Spectra Energy Partners’ choice positioning in the Marcellus Shale, which is the country’s most plentiful shale formation.
The premium positioning of Spectra Energy Partners’ assets is only one aspect of what makes the partnership such an attractive investment. Spectra Energy Partners, which essentially owns and operates long-haul natural gas and crude oil pipelines, is a very steady, cash generative, “toll booth” business that is currently yielding around 6% per year. In fact, Spectra Energy Partners has no underlying commodity price exposure whatsoever, meaning that natural gas or oil prices don’t affect earnings. Customers reserve pipeline space in advance using long-term contracts and pay fees to Spectra Energy Partners regardless of the volume of natural gas or crude oil that flows through their lines. Additionally, in many of the areas where Spectra Energy Partners operate, they’re the only game in town, meaning they’ve been granted essential monopoly rights on pipeline energy transport in that area. The crown jewel of the partnership is the Texas Eastern pipeline which flows from the Gulf Coast to New York. This pipeline is capable of moving up to 10% of United States gas consumption and connects most of the east coast to the Marcellus Shale. For your convenience we’ve included a slide from a recent investor relations presentation which highlights the partnership’s assets.
We will continue to monitor the transaction and let you know if any events occur which will impact our investment.