This $6 Billion Merger Proposal Has Oil Exports Written All Over It

Midstream energy specialist Enterprise Products Partners is making a multibillion-dollar bet that the U.S. will soon end its 40-year ban on domestic oil exports. The company said this week it had acquired a two-thirds majority stake in Oiltanking Partners  for $4.6 billion and offered to buy the rest of the company for another $1.4 billion. Let's look at the proposed deal and how it better positions Enterprise Products Partners for oil exports.

Source: Enterprise Products Partners Investor Presentation 

Rationale behind the proposal
Enterprise Products Partners and Oiltanking Partners have worked together for more than 30 years. So closely, in fact, that 31% of Oiltanking Partners' revenue and 40% of its EBITDA last year came from Enterprise, which is its largest customer. Oiltanking Partners provides its partner with essential dock and storage for its LPG export and octane enhancement businesses, which contribute 10% of Enterprise Products Partners' gross operating margin. This is a key relationship, which is why Enterprise wants to take control of Oiltanking Partners.

However, beyond the strategic ties between these two companies lies the fact that Oiltanking Partners' assets are strategically located to take advantage of U.S. oil exports if the four-decade prohibition is lifted. Oiltanking Partners owns marine terminals on the Houston Ship Channel and the Port of Beaumont in Texas. It owns 12 ship and barge docks and storage capacity for about 24 million barrels of crude oil and petroleum products. That access to water and ample storage capacity put Oiltanking Partners in prime position to export oil in the event of federal approval of such business. That's a position Enterprise wants to control as its ECHO storage facility is already connected to Oiltanking Partners' system, so the deal would extend Enterprise's opportunities to profit from oil exports.

While these assets are currently used to move and store refined petroleum products, Enterprise sees some of them as prime candidates for being repurposed to eventually export oil. In addition, Oiltanking Partners has built-in growth opportunities that have further positioned the company for oil exports. For example, its Beaumont Crude Project includes the addition of up to 6.2 million barrels of crude oil storage capacity and two new deepwater docks.

Source: Oiltanking Partners Investor Presentation  

All that being said, even if the U.S. doesn't end the oil export ban this is still a smart deal for Enterprise Products Partners. Taking control of Oiltanking Partners gives the company greater opportunities to profit from the energy commodities that can be exported to other countries, including refined petroleum products, LPG, and ethane. 

Investor takeaway
Enterprise Products Partners is achieving two critical goals by taking control of Oiltanking Partners. First, the company is buying one of its most strategic partners in a deal that will give it control of assets that are key to its business. More importantly, Enterprise is acquiring a company that has two assets that are perfectly located to take advantage of future oil exports in the United States.

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Matt DiLallo owns shares of Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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