It's rare to see optimism in the energy sector lately, but analysts so far are taking an optimistic view on reported merger talks between TransCanada (TRP) and Columbia Pipeline Group (CPGX).
"There is a clear fundamental logic on TRP wanting greater exposure to the Marcellus and Utica -- and acquiring CPGX not only provides geographic diversity, a look at a map of the systems shows a reasonably logical fit and CPGS has roughly $8 billion of commercially secure growth projects, which could add to TRP's own growth visibility going forward," Andrew Kuske of Credit Suisse wrote in a report on Thursday.
The Wall Street Journal reported on Thursday, citing sources, that a deal in which TransCanada takes over Houston-based Columbia Pipeline Group may be reached within a few weeks. As a result of trading activity spurred by the report, TransCanada issued a statement in which it confirmed merger discussions with an unnamed third party, but said that no agreement had been reached. Shares of TransCanada fell 3% on Thursday while Columbia Pipeline Group shares rose 8.5%.
Should a transaction occur, the value of the deal could be $12.1 billion, Kuske wrote, while also clarifying that his analysis included many assumptions, such as the deal being financed through an 80-20 mix of equity and debt, and the interest rate on the debt being 4%.
Such a deal could prove beneficial for TransCanada, which has suffered recent setbacks in attempts to expand its pipeline network.
"For TransCanada, following the cancellation of the Keystone XL pipeline, and regulatory or commercial delays to some of its other mega-projects, such as Energy East and LNG pipelines to British Columbia, we believe management may look to other capital allocation opportunities to generate growth, including M&A," Theodore Durbin of Goldman Sachs wrote on Thursday.
Additionally, TransCanada would expand geographic reach through such a transaction, which could counter its exposure to the now-troubled Western Canada region, Kuske noted. Columbia Pipeline Group operates 15,000 miles of pipeline and natural gas producing assets along the east coast of the United States.
If a deal were to be announced -- and ultimately approved -- it could add slightly to revenue by 2018 and more so in 2019, according to Kuske.