Enbridge Signs Deal with Atlas - Analyst Blog

Houston-based Enbridge Energy Partners LP (EEP) recently announced plans to acquire Elk City Gathering and Processing System (ECOP) from Atlas Pipeline Partners LP (APL) for $682 million. The transaction will enable Enbridge to take advantage of the rising natural-gas output in Oklahoma and Texas .

The purchase includes ECOP’s assets of 800 miles (1,287 kilometers) of pipelines and four gas-processing plants in southwestern Oklahoma and the Texas Panhandle. The daily capacity of ECOP is 370 million cubic feet of gas and produces 20,000 barrels of gas liquids such as propane and ethane.

The partnership also highlighted that it will integrate Elk City into its 1,800-mile Anadarko system in the same area. The consolidation with Anadarko will not only be beneficial for natural gas producers in the area, but also to the partnership. The acquisition is expected to close by late third quarter or in the fourth quarter of 2010.

We believe the deal will enhance Enbridge Energy’s capacity to ship fuel as well as capitalize on the growth prospects in the Granite Wash.

Upon integration with the partnership’s Anadarko system, the acquisition will be accretive to earnings. This coincides with the partnership’s objective to increase distributable cash flow. Following a 1.3% rate increase in the first quarter, Enbridge raised its second-quarter cash distribution rate by 2.5%. This growth momentum is notable as Enbridge has kept its distribution unchanged for quite some time.

We are impressed with the partnership’s investment strategy and the diversification of its asset base that has created opportunities for internal growth. However, we remain concerned with the partnership’s discounted valuation relative to its peer MLP (master limited partnership) group that primarily reflects its weak distribution growth prospects. We thereby maintain our Zacks#3 Rank (Hold) for Enbridge.