Receive free Energy sector updates
We’ll send you a myFT Daily Digest email rounding up the latest Energy sector news every morning.
The North American fossil fuel sector is undergoing a wave of transactions tied to changes in the energy mix, with companies placing their bets on the relative values of oil, natural gas or clean power.
The moves are happening as electricity consumption rises in response to demand from sources such as electric vehicles and data centres. More EV use may in turn mean less petrol burnt in the years ahead.
The latest deal was the $18.8bn sale of pipeline company Magellan Midstream Partners to rival Oneok this week.
Magellan’s pipes and storage tanks are heavily concentrated in oil, while Oneok’s assets carry more natural gas. In making its case for the deal, Magellan management cited expert estimates that US petrol demand could fall by more than 50 per cent by 2050, saying it “could face long-term secular risks as a standalone company”.
An investor opposed to the deal, Energy Income Partners, pointed out that this position was a U-turn from a bullish management outlook offered as recently as 2022. Magellan “completely reversed its view of industry prospects”, EIP said in a securities filing.
But 55 per cent of outstanding Magellan unit holders approved the transaction on Thursday.
Energy groups such as Magellan are reassessing their futures amid efforts to decarbonise the economy. The International Energy Agency said this month that global demand for fossil fuels would likely peak this decade. Many analysts reckon gas’s role in power generation could give it greater longevity than oil, which is heavily used for transport and emits more carbon dioxide when it burns.
TC Energy, the Canadian company behind the abandoned plan to build the controversial Keystone XL crude oil pipeline, is in the process of spinning off its oil business to focus on handling natural gas, a split it said would leave TC “uniquely positioned to meet growing industry and consumer demand for reliable, lower-carbon energy”.
Enbridge, another Canadian pipeline company, this month announced the $14bn purchase of the natural gas distribution business of Dominion Energy, one of the biggest US utilities, hailing a “once in a generation opportunity” to snap up “must-have infrastructure”.
For Dominion, the deal is also a bet on the transition, allowing it to sharpen its focus on state-regulated electric utilities and free up capital to invest in renewables to meet growing power demand.
“They’re taking bets on different things,” said Raoul LeBlanc, an analyst at S&P Global. “Utilities are saying: well, we think renewables are really going to work well and . . . we want to be front and centre.”
LeBlanc added that “the oil guys and the people who have been in the gas business are saying: gas has a lot going for it and it is the fuel that will become important if the road to renewables doesn’t work”.
While leaky gas pipelines are responsible for emitting methane, a powerful greenhouse gas and contributor to climate change, oil spills are more visible and can be more costly to insure. A recent 500,000-gallon spill of crude oil from TC Energy’s Keystone pipeline in Kansas cost about $480,000 to clean up.
Executives and analysts say big investors have become increasingly conscious of environmental, social and governance — or ESG — factors when deciding where to put their cash. That has made capital more difficult to come by for fossil fuel businesses, oil in particular.
“Crude logistics deals have been tougher than natural gas deals in part due to ESG,” said Pete Bowden, global head of industrial, energy and infrastructure banking at Jefferies. “There seems to be a perspective on the part of buyers that oil transportation is riskier because it’s a heavier, dirtier product.”
The uptick in dealmaking across the so-called midstream energy infrastructure sector also reflects waning appetite to build new pipelines after a construction frenzy during the height of the shale revolution. Legal battles brought by environmentalists and local landowners have made new projects less attractive.
“If you can’t build, you buy,” said Keith Fullenweider, chair of law firm Vinson & Elkins.
“There’s definitely a sense that new construction, permitting, the cost of construction and interest rates are making new builds more difficult, less attractive,” he added. “And those are the sort of conditions that will typically encourage folks to look at consolidation as an alternative.”
After this week’s Magellan vote, Energy Income Partners said it was disappointed.
“In our experience, Magellan was a company with excellent assets and historically excellent management,” said EIP, which had a 3 per cent stake in the company. “We’re sorry things had to change.”
Read the full article here
