Cash-starved oil producers trade pipelines for money

OIL and natural gas producers confronting a cash drain are auctioning off the family silver: pipelines and processing plants.

  Bakken shale billionaire, Harold Hamm and Canadian gas giant, Encana Corp. are among the latest to peddle some of their most valuable assets and steadiest earners. 

  The development was sequel to the plummeting oil prices which have deflated the value of drilling operations. Pipes and plants are about the only things attracting big payments for producers vying to stay afloat.

  The deals for quick cash are another facet of the energy industry meltdown leading to more than $40 billion in spending cuts and thousands of job losses.   The capital infusion comes with a trade-off because producers pay more to process and transport fuel over the lines and in the facilities they used to own.

  Midstream operations, as they’re known in the oil and gas industry, have retained their value even with crude trading near six-year lows, because they act as toll booths that generate dependable cash, regardless of commodity prices. Offloading them lets producers avoid selling the oil fields at the heart of their businesses at steep discounts.

  The Hamm family’s Bakken pipeline network went for $3 billion, including debt, to billionaire Rich Kinder’s empire in a deal announced last month. Encana is reaping C$412 million ($328 million) from the sale of gas pipelines and plants in Western Canada’s Montney shale region to Veresen Inc. and KKR & Co., in a December deal.

  Even with oil worth about twice as much just a year ago, producers looking for cash to fund drilling sought to unlock the value in their midstream businesses through sales and spinoffs.

  Before the oil rout, Royal Dutch Shell Plc and Devon Energy Corp. were already cashing in on infrastructure built when the shale boom took them into new regions not connected to the existing grid.

  Now, the incentive to give up pieces of these cash-generating treasure troves is that much stronger.

  “The decline in commodity prices should free up some assets that are embedded in various producers,” said Salim Samaha, a partner at Global Infrastructure Partners, an investment firm based in New York.

  For Hamm’s Hiland Partners LP, Kinder Morgan Inc. is paying 15 times what the assets will earn this year, before interest, taxes, depreciation and amortization, or Ebitda, according to RBC Capital Markets LLC. An exploration and production company would sell for less, between three and 10 times Ebitda, said James Sullivan, an analyst at Alembic Global Advisors in New York.

  Hamm only agreed to the sale after being certain the Bakken producer he runs, Oklahoma City-based Continental Resources Inc., would have a good, long-term relationship with Rich Kinder’s Kinder Morgan, Hamm said in a Jan. 28 interview in Houston.

   The swings in the two billionaires’ fortunes illustrate how the value of midstream assets is surviving the energy industry’s turmoil.

Hamm, a 69-year-old wildcatter who pioneered extraction in the Bakken, has seen his net worth shrink $5 billion since November to about $11 billion as Continental Resources’ value slumps along with crude’s price, according to the Bloomberg Billionaires Index.

  Seventy-year-old Kinder, who built the world’s most valuable pipeline company shipping oil and gas across North America, has caught up with Hamm after becoming $1 billion richer over the same period.

Pioneer Natural Resources Co., based in Irving, Texas, is seeking a similar windfall to Hamm’s Hiland deal with the sale of its EFS Midstream in the Eagle Ford shale, which it owns with India’s Reliance Industries Ltd. They expect to net more than $3 billion, people with knowledge of the process said last month.