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Pembina-Provident deal about growth, not costs

Pembina's operations include more than 8,500 km of pipeline.

Pembina Pipeline Corporation

Pembina Pipeline Corp.'s purchase of Provident Energy Ltd. isn't driven by the potential to save money. It's all about prospects for growth.

Combined, the two firms have a market capitalization of $7.9-billion. That's sizable enough to let the new Pembina , with Provident wrapped into it, compete for and bid on major projects.

"Pembina's going to have the ability now to compete for projects that are literally world scale," Doug Haughey, Provident's chief executive officer, said on a conference call Monday. "I wouldn't look at this in terms of cost reduction synergies."

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The two companies also have complementary businesses. Mr. Haughey has stated the importance of touching every aspect of the value chain for some time, and on Monday said "that's more true now than ever." While Pembina had been doing well on its own because it has more liquids to transport, it was missing the ability to fractionate, something Provident is good at.

Plus, now the two companies benefit from being bulky. The combined firm's debt to earnings before interest, taxes, depreciation and amortization sits at 2.4 times, which Pembina thinks is quite low. Historically, Provident hasn't been able to put much leverage on its assets, but Pembina thinks that will change now that they have a broader cash flow base behind them.

Much of this deal rests on the prospects for natural gas, and there was a lot of talk on the conference call about the strength of Provident's Red Water fractionator. (Think of it as a machine that separates mixtures of liquid and gas into different fractions). Pembina had been working on developing its own fractionator, but chief executive officer Bob Michaleski said that costs of doing so were quite high. Instead, they bought Provident.

This machine is so lucrative because fractionation capacity in Fort Saskatchewan is a problem. But because Provident has one, Pembina believes Red Water "has got to become the premier hub for liquids moving in and out of the Fort Saskatchewan area."

As for how these two firms came together, it was revealed that Pembina reached out in December, and an exclusivity agreement was signed two days for Christmas. Not so happy holidays for the deal teams and their families.

Scotia Waterous, Blake, Cassels & Graydon and Paul, Weiss, Rifkind, Wharton & Garrison advised Pembina, while TD Securities and Norton Rose Canada advised Provident.

Pembina said it will pursue an NYSE listing because about 70 per cent of Provident's holders are located south of the border.

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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