Bakken to take lead in midstream asset sales

OREANDA-NEWS. June 18, 2015. Hess' sale of some of its midstream assets points to a step up in similar divestitures by peer independents, with sales in the Bakken region in North Dakota possibly taking the lead over other key oil producing areas in the country.

US independents, which helped make the US the world's largest oil producer last year overtaking Saudi Arabia, are looking to reinforce their balance sheets and fund drilling. The companies are selling assets, picking areas that offer the best returns and developing better technology as cash inflows get squeezed with oil prices still nearly 50pc below the 2014 highs.

Pipeline and other infrastructure constraints and a longer distance than other shales from the major refining and storage hubs have always meant that Bakken crude has fetched a discount, sometimes as steep as \\$20/bl, to the benchmark Nymex WTI. That is possibly putting greater pressure on producers that are focused in the area to shed assets.

Hess sold a 50pc stake in its Bakken midstream assets to Global Infrastructure Partners for \\$2.675bn. The assets include a natural gas processing plant and rail loading terminal in Tioga, North Dakota, associated rail cars, a crude oil truck and a pipeline terminal in Williams county. Crude and natural gas gathering systems in North Dakota and a propane storage cavern and rail and truck transloading facility in Mentor, Minnesota, will also be part of the deal.

"The company will use proceeds from this transaction to preserve the strength of its balance sheet in the current oil price environment" and "financial flexibility for future growth opportunities," Hess said.

The price Hess got was above expectations, according to most investors. That may prompt Whiting Petroleum, which acquired Kodiak last year to become the biggest Bakken producer, to go ahead with its proposed divestiture.

"We remain confident that Whiting will sell its own gas processing plants for a healthy valuation this year," Oppenheimer said. It reiterates its outperform rating on the producer "as we believe the current sharp discount to peers reflects overblown liquidity concerns."

Whiting Petroleum is looking at divestitures of \\$500mn-\\$1bn this year to fund capital expenditure and repay some of the near in \\$3bn debt resulting from the Kodiak acquisition. Some of the sales will include midstream assets, chief executive Jim Volker said.

Midstream deals are a win-win, especially if they include storage facilities. That is because a weak oil market and a contango structure, where future prices are higher than those for the immediate month, prompts more and more traders and producers to store the oil. "Strong storage demand is driving higher rates for new storage tanks and contract renewals as well as higher capacity utilization," Barclays said, adding that demand for segregation, blending and marketing will grow with US output at a 32-year high.

Mega midstream deals for the year were kicked off by Kinder Morgan buying Bakken pipeline company Hiland Partners from founder and Continental Resources chief executive Harold Hamm, for \\$3bn.

"Think of what we are doing as building a spider web that we will continue to expand over the coming months and years," chief executive Rich Kinder said after the deal.

Oasis Petroleum, which is "looking at a different options" to monetize its water disposal unit in the Bakken called Oasis Midstream Services (OMS). The company may bring in a strategic partner or just a capital partner to fund some of the capital and own an interest.

"There is a component of it that is financing," chief executive Tommy Nusz said. "There is a component of it that's having the right partner."

Enlink Midstream in February signed a deal to acquire hedge fund-backed Coronado Midstream, which owns natural gas and processing facilities in the Permian basin, for \\$600mn.

Other producers as well, who are more focused on the Eagle Ford and Permian basins of Texas, the other two main shale basins, are also shedding midstream assets. Pioneer and India's Reliance Industries sold their Eagle Ford shale condensate and natural gas gathering joint venture for \\$2.15bn to Enterprise Products Partners.

The sale will "allow us to strategically redeploy capital to our core, oil-rich Spraberry/Wolfcamp asset in the Permian," Pioneer chief executive Scott Sheffield said.

Ferrellgas earlier this month said it would buy midstream company Bridger Logistics for \\$837mn. Apart from buying Hamm's Hiland Partners, Kinder Morgan also shelled out \\$158mn in February on terminals from Royal Vopak.