...

Buyout firms put energy infrastructure in pipeline

Business Materials 2 March 2008 08:59 (UTC +04:00)

( Reuter )- Private equity firms are snapping up energy infrastructure assets like pipelines and storage facilities, which are some of the few buyouts likely to attract financing as credit markets remain in a deep freeze.

Firms keen to put capital to work say their ability to spend immediately on infrastructure makes them ideal buyers when energy companies jettison assets, as with First Reserve's recent deal to buy a 20 million-barrel storage terminal off the Florida coast -- the Caribbean's largest.

"These are assets that the majors need to access and influence but may not want to completely own or take the risk of building out," First Reserve Managing Director Thomas Sikorski said. "If we can position ourselves in the middle of that, we start acting truly strategic."

Opportunities may be picking up. Cheniere Energy (LNG.A) recently said it was looking at strategic options for its Sabine Pass LNG receiving terminal in Louisiana, near the Gulf of Mexico. And First Reserve, an energy-focused private equity firm, agreed to join with Blackstone Group (BX.N) and Europe's Petroplus Holdings AG (PPHN.VX) in a $2 billion deal to buy U.S. oil refineries.

Such assets may let private equity take advantage of the red-hot energy sector without the risk tied to exploration and production (E& P). Also, cash flow from long-term contracts could help them tap today's ultra-tight credit markets.

"From the point of view of private equity, they're a steady stream of income," said Dino Barajas, a partner at law firm Paul Hastings who works on energy and power deals. "You don't really care if someone's using your pipeline -- if they've contracted for the capacity, there's your check in the mail."

Private equity firms envision compiling a network of infrastructure assets worth more than the separate components.

These assets are often overlooked by oil companies. With crude prices hovering around $100 a barrel, those companies have invested in E& P or share buyback programs rather than on relatively low-return infrastructure assets.

"We've had interesting conversations where E& P companies say: 'We just don't get rewarded for running a great midstream business,"' said Christopher Behrens, a managing director of CCMP Capital Advisors, the former private equity arm of JPMorgan Chase & Co (JPM.N).

Behrens added that private equity makes a good partner for those companies "because of the size of checks we can write and our ability to commit for a relatively long period of time."

Private equity firms have an advantage in developing energy infrastructure, particularly in comparison to the master limited partnerships (MLPs) that have become a popular structure for holding such assets. MLPs pay no corporate taxes, but distribute most of their profits to investors and often have to rely on external financing to fund growth.

"The idea is to get gas out of the regions where it sits and into consuming regions," said Lee Mallett, a managing director in the energy investment banking group at Credit Suisse (CSGN.VX), which is advising Cheniere on Sabine Pass.

The U.S. Southeast is ripe for such development, Mallett said, and market sources say there is plenty on sale, including other storage facilities in Florida and nearby states.

Sikorski said First Reserve is also developing a strategy in the Southeast -- and is considering eventually forming an MLP with its U.S. assets.

Opportunities for private equity in energy infrastructure are not limited to the United States. Among the regions the firms say they are considering are areas surrounding Singapore and around the Strait of Hormuz in the Middle East.

"When you start looking around the planet and tracking these global flows, everybody has the same problems," Sikorski said. "Really it's just logistics."

Latest

Latest