UPDATE 2-Spectra moves into oil transportation with $1.49 bln pipeline buy

Tue Dec 11, 2012 11:22am EST

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By Swetha Gopinath

Dec 11 (Reuters) - Spectra Energy Corp said it will spend $1.49 billion to buy the Express-Platte System, one of the three major pipelines that move crude oil from Western Canada to refineries in the Rocky Mountain and Midwest regions in the United States.

The purchase, which comprises $1.25 billion in cash and $240 million in debt, will give Spectra a foothold in the rapidly expanding North American crude oil pipeline market and lower its dependence on natural gas.

"Given today's regulatory environment, the fact that these assets are in the ground already is a huge advantage as we enter the sector," Chief Executive Gregory Ebel said on a conference call with analysts.

Canada has only three major pipelines that take conventional and oil sands crude into the Midwest, and fears are mounting that the export of Canadian crude will be constrained due to pipeline project delays, even as production burgeons.

TransCanada Corp's Keystone XL pipeline, designed to transport Canadian crude oil from Alberta to Port Arthur in Texas, has been mired in regulatory issues.

"We like this move as it offers Spectra a new growth platform. Given the present difficulties in sighting any new energy infrastructure, this provides a backbone to compete," BMO Capital Markets analyst Carl Kirst wrote in a note to clients.

Spectra will pursue investments in oil and refined products pipelines, storage tanks and terminals, CEO Ebel said.

Strong crude oil prices and limited access to pipelines or other means has made the business of transporting the fuel to refineries a lucrative one.

"They wanted to get away from being totally in the gas business, so they bought an oil pipeline. Probably not their last," said Jerry Swank, founder of Swank Capital, which primarily invests in midstream companies.

EXPRESS-PLATTE PIPELINE DEAL

The Express pipeline takes up to 280,000 barrels per day (bpd) of crude oil from Hardisty, Alberta to U.S. refining markets in Montana and Wyoming. The smaller Platte line carries about 164,000 bpd from Guernsey, Wyoming to Wood River, Illinois.

The transaction, which will likely close during the first half of 2013, is expected to add 3 to 5 cents per share to annual earnings in the first year, the company said.

CEO Ebel noted the pipeline system's fee-based revenue and annual rate escalators as positives. The pipeline serves refiners such as Exxon Mobil Corp and Phillips 66 .

The Ontario Teachers' Pension Plan, Borealis Infrastructure, and pipeline operator Kinder Morgan Energy Partners each held a one-third stake in the Express-Platte pipeline system.

Kinder Morgan will get $380 million before tax from the sale of its interest in the pipeline, while Ontario Teachers' Pension Plan and Borealis Infrastructure will get $430 million each.

Spectra shares were marginally down at $27.17 on Tuesday morning. The stock has fallen about 12 percent so far this year.

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