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Kinder Morgan places $40 billion shale-gas bet

Acquisition of midstream and upstream independent El Paso creates $94 billion company

Kinder Morgan’s $37.8 billion bet on shale gas will make it North America’s largest pipeline operator and the fourth-largest energy company in the world. The US pipeline company is buying Houston-based midstream and upstream independent El Paso in a cash-and-scrip deal worth $26.87 a share, creating a company with an enterprise value of about $94 billion.

With the deal, which is expected to close in the second quarter of next year, Kinder Morgan becomes the largest independent transporter of petroleum products in the US – at some 1.9 million barrels a day (b/d), on 80,000 miles of pipelines – and the largest transporter of carbon dioxide used in enhanced oil recovery. The company said it expects to make annual operating savings of about $350 million a year as a result of the deal.

Upstream operations

The bigger question is what happens to El Paso’s exploration and production assets. It is a big player in several Lower-48 unconventional-gas basins, including Texas’s Haynesville Shale. Last year, it produced about 800 million cubic feet a day (cf/d) of gas and is sitting on 6.7 trillion cf of reserves.

El Paso is also the largest oil producer in Texas, with production of 50,000 b/d. Raymond James analysts Darren Horowitz and Kevin Smith said the properties could be worth up to $9 billion, which would be used to pay down debt.

Over the longer term, the deal is one more illustration of the changes brought on by the boom in North America’s shale-gas plays. "This once in a lifetime transaction is a win-win opportunity for both companies," said Kinder Morgan chairman Richard Kinder.

"Natural gas will play an increasingly integral role in North America. With the recent development of shale resources, there are now abundant domestic supplies. If the US is serious about reducing carbon emissions, to benefit the environment, and reducing its dependence on foreign oil, natural gas is absolutely the best readily available option."

Kinder Morgan also operates the only oil-sands pipeline serving the west coast of Canada. The Trans Mountain pipeline system carries 300,000 b/d to Vancouver, British Columbia, and the US’ Washington state.

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