Kinder Morgan - KKR Announce Midstream Deal for Camino Real and Altamont Assets

Kinder Morgan is acquiring KKR's 50% interest in a joint-venture with El Paso that controls gathering and processing assets in Utah and the Eagle Ford Shale for $300 million. The deal is a precursor to the $20+ billion Kinder Morgan - El Paso acquisition that will close in May. At closing of both deals, Kinder will own 100% of the two systems. Both systems were in place to help gather and process El Paso's upstream oil and gas production in the areas. The Camino Real System in South Texas has capacity of 150 mmcf/d and 110,000 b/d. The Altamont system is larger and includes over 1,000 miles of pipelines, a processing plant, and a natural gas fractionator.

With over 1,100 miles of pipeline infrastructure, the Altamont system includes over 450 well connections with producers, and it operates a processing plant with the design capacity of 60 million cubic feet per day (MMcf/d) and a 5,600 barrel per day (Bpd) natural gas liquids fractionator. The Camino Real Gathering System has 150 MMcf/d of gas gathering capacity and 110,000 Bpd of oil gathering capacity.

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Reliance - Apollo Evaluate El Paso Assets

Since Kinder Morgan's $21+ billion acquisition of El Paso was announced, it was believed Kinder would sell the accompanying exploration and production assets. We explored the possibility in more detail in the blog post "El Paso's Eagle Ford Assets on the Market" The real question is whether the e&p assets will be sold all together or if they will be sold in parts. I'm sure Mr. Kinder knows how much other deals have gone for and he'll want to get a similar premium for El Paso's Eagle Ford assets. If he doesn't get the premium or dang close baked into a deal for the entire business unit, he'll sell the assets off one by one. Expect a decision on selling the whole or parts real soon. Publicized estimates of El Paso's e&p value are around $8 billion.

Both Reliance Industries and Apollo Global Management are in talks to buy the unit. Reliance would be buying an operated stake in the U.S. where to date it only acts as a non-operated partner in the Marcellus Shale. Apollo would be adding a significant e&p business that it would likely grow and market to other companies or eventually IPO. Private equity firms like Apollo usually hold assets for 3-10 years. 

Reliance Industries Ltd. and Apollo Global Management LLC are among companies in talks to buy El Paso Corp.'s oil and gas exploration and production unit, said people with knowledge of the matter.



Big Firms Say Shale Plays Are Here To Stay

"Shale gases have redefined natural gas supply" is the quote from Hill Vaden of Wood Mackenzie. As large scale firms enter shale plays across the U.S., it is an indication that things have changed for the long term. The Kinder Morgan - El Paso merger is the latest shale driven deal that expands a companies foot print and leverage to the growing shale boom. With Exxon and international companies like Statoil in the fray, you can bet many of the development decisions that are made today are part of long - very long term plans. Shale plays are ushering in a new wave of domestic development. Just visit North Dakota, Pennsylvania, or Texas if you don't believe me.

Since 2008, energy companies have spent $133 billion on mergers and acquisitions related to shale, according to energy research firm IHS-Herold. That's more than China spends on its military annually — the second-largest defense budget in the world behind the United States'.

And that includes just companies gaining access to the acreage and resources for shale drilling. It doesn't count Kinder Morgan's $21.1 billion deal to buy El Paso Corp. and its network of natural gas pipelines.

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El Paso's Eagle Ford Assets on the Market

El Paso Corporation and Kinder Morgan announced a $38 billion transaction where the later will acquire all of El Paso's assets. The deal will create a pipeline and midstream company that is the 4th largest energy company in North America (Enterprise Value of >$90 Billion). El Paso had plans to spin off its exploration and production business at the end of the year, but those plans are delayed until Kinder Morgan has full control of the assets. The company still plans to divest the E&P assets, but is more likely to sell individual assets instead of spinning off a new entity. That means there are Eagle Ford wells and acreage on the market.

An international company like BHP or the Eagle Ford partnership between Talisman and Statoil are the most logical bidders. The proximity fits and both entities have the cash.

El Paso's Eagle Ford assets are located in La Salle County, TX where both Petrohawk (now BHP) and Talisman-Statoil operate. The El Paso assets would compliment other transactions by the same companies:

It's not Eagle Ford related, but Statoil announced the acquisition of Bakken focused Brigham Exploration on October 17, 2011. By becoming an onshore operator, I suspect the company's appetite for acreage will grow.

None of the three companies companies have been shy about acquiring U.S. shale assets. The El Paso acreage falls right in the middle of the Talisman-Statoil partnership and just west of BHP's Hawkville asset. It's a logical fit, but you never now how a company's appetite changes from day to day. With all of the bullish sentiment around the Eagle Ford, I doubt it will take long for someone to swoop in on this deal.

“On the PE side, the odds are that these assets would be sold separately,” said Adam Connors, a director in corporate finance group of boutique investment bank C.K. Cooper & Co. “There could also be another E&P company buying whole thing, but in terms of the odds of a PE firm picking up all of it and operating it effectively – they’re slim.”

The assets include El Paso’s “active drilling program” in the Eagle Ford Shale in South Texas, an emerging Wolfcamp position, as well as portions of its Gulf of Mexico and South Texas assets. It also includes Haynesville, Wilcox – a conventional gas play – and Altamont, up in the Rockies. Additional operations are in offshore Brazil and Egypt’s Western Desert.



Eagle Ford Shale Region Experiencing a Record Drought

South Texas is experiencing one of the worst three droughts on record.  Producers are coming up with creative ways to conserve resources and tap water resources that have gone unused for many years.

"We have not experienced any problems obtaining water," in the play, Richard Wheatley, a spokesman for El Paso Corp., said.

The Houston-based producer and pipeline company, which has drilled about 30 wells in the so-called central region of the Eagle Ford play, uses groundwater either from water wells the company itself has drilled or that it has purchased under contract with ranchers in the region.

El Paso uses no surface water from lakes or rivers in the region, Wheatley said.

Petrohawk, one of the operators that pioneered the development of the Eagle Ford, has reduced its water needs by two-thirds since it began drilling in the play about three years ago, spokeswoman Joan Dunlap said.

"We use much less water for Eagle Ford wells than is required for wells in other plays. We are down to using less than 5,000 barrels per frack stage, as opposed to 15,000 barrels per stage," she said.

She added that the company's operations actually result in increasing the access to water supplies for surface landowners in the region.

"Our Hawkville field sits atop a prolific 500-foot thick aquifer located between 4,000 and 5,000 feet underground," Dunlap said.

"The landowners, largely ranchers and farmers, have no means to access this water for their use. Nearly every lease calls for the drilling of a water well, at the company's expense, that is used for well completion operations and then turned over to the surface owner for future domestic use," she said.

"Since these water wells cost about $500,000 each, we don't know a landowner that isn't tickled pink with

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