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Mar 26, 2024

Enbridge joint venture to connect Permian Basin natural gas to U.S. Gulf Coast

Lower toll rates weigh on Enbridge

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Pipeline giant Enbridge Inc. has signed a deal to form a joint venture to help connect Permian Basin natural gas to liquefied natural gas export terminals on the U.S. Gulf Coast.

The Calgary-based company said Tuesday it will partner with global investment manager I Squared Capital and U.S. pipeline firms WhiteWater and MPLX LP.

The new joint venture will develop, construct, own, and operate natural gas pipeline and storage assets connecting the Permian (a major oil-and-gas field located in western Texas and southeast New Mexico) to growing LNG and U.S. Gulf Coast demand.

Enbridge has been bullish on both natural gas and LNG in recent years, repeatedly stating  it believes demand for natural gas is not going away any time soon and that cleaner-burning LNG can be used to replace coal in parts of the world that still depend on the dirty fuel.

The Canadian company currently supplies natural gas to five operating LNG export facilities on the U.S. Gulf Coast and has previously said it is interested in expanding its export strategy through further acquisitions in the region.

Under the deal, Enbridge will contribute to the joint venture its proposed Rio Bravo pipeline project — which would transport natural gas to an LNG export facility currently being constructed by developer NextDecade at the Port of Brownsville in South Texas — as well as US$350 million in cash. Enbridge will also fund the first US$150 million of the post-closing capital spending to complete the Rio Bravo project.

The joint venture will also hold the Whistler pipeline — which began operations in 2021 and runs from the Permian Basin to Agua Dulce, Texas — as well as a 70 per cent interest in the ADCC intra-state pipeline to Corpus Christi, Texas and a 50 per cent stake in the Waha gas storage facilities.

Under the terms of the deal, WhiteWater/I Squared will hold a 50.6 per cent interest in the joint venture, while MPLX will own 30.4 per cent.

In addition to receiving a 19.0 per cent equity interest in the joint venture, Enbridge will keep a 25 per cent economic interest in the Rio Bravo project.

In a news release, Enbridge's chief financial officer Path Murray said the deal will be immediately accretive to cash flow as well as paving the way for future growth opportunities.

"Having access to new Permian natural gas infrastructure enhances and increases the visibility of our medium-term growth outlook," Murray said.

Robert Kwan of RBC Capital Markets said in a note to clients that he likes the deal for its financial benefits as well as the strategic expansion of Enbridge's gas footprint.

"That being said, we do not expect the transaction to materially impact Enbridge's share price due to the relatively modest overall transaction size that is consistent with management's prior messaging that it is not pursuing large deals," Kwan said.

The deal is expected to close in the second quarter of 2024, subject to regulatory approvals and other customary closing conditions.

This report by The Canadian Press was first published March 26, 2024.