DCP Midstream Partners LP reached an agreement to acquire the remaining 66.7% interest in the Southeast Texas joint venture from its general partner, DCP Midstream, in a $240 million dropdown acquisition. As part of the agreement, DCP Midstream will take approximately 20% of the total consideration in common units from the partnership.

The agreement, expected to close by Q2 2012, will add 675 miles of natural gas pipelines, 9 billion cubic feet of natural gas storage capacity, along with three natural gas processing plants with a total of 400 million cubic feet per day (MMcf/d) of processing capacity. The assets have favorable access to interstate and intrastate industrial gas markets, as well as NGL market deliveries to ExxonMobil and Mont Belvieu via the company’s Black Lake NGL pipeline.

“This asset has a mix of fee- and commodity-based margins, with commodity exposure expected to be substantially hedged, consistent with our overall hedging philosophy. In conjunction with the transaction, DCP Midstream will provide us with a direct NGL product hedge for a three-year period,” Mark Borer, president and chief executive of DCP Midstream Partners, said during the company’s Feb. 28 conference call to discuss Q4 2011 earnings. “It’s another prime example of how we are co-investing and effectively partnering with our general partner. In line with our strategy of utilizing MLP as a growth vehicle for the DCP enterprise, DCP Midstream will re-deploy the proceeds into ongoing capital projects.”

This latest dropdown continues with the partnership’s previous successes in co-investments with DCP Midstream. Since Q4 2010, it has participated in agreements totaling roughly $700 million. These include the third-party acquisition of the DJ Basin Fractionators, the completion of the Wattenberg NGL pipeline expansion, the construction of the 200 MMcf/d natural gas processing plant in the Eagle Ford shale, and the dropdown acquisition of the East Texas joint venture.

Since Q4 2010, the company has announced approximately $700 million of co-investment agreements, including the third-party acquisition of two DJ Basin fractionators, the Wattenberg NGL pipeline expansion project, a 200 million cubic feet per day (MMcf/d) Eagle Ford processing plant that is set to complete in Q4 2012, and the Southeast Texas joint venture dropdown acquisition.

These investments and acquisitions have helped fuel the company’s ability to generate organic projects such as the Discovery Pipeline expansion in the deepwater Gulf of Mexico. This project, the Keathley Canyon Connector, is being undertaken in a partnership with Williams Partners as the system’s operator.

This pipeline will run 200 miles with a 400 MMcf/d capacity and is supported by long-term fee-based natural gas gathering and processing services agreements with the Lucius and Hadrian South owners.

Additionally, DCP Midstream Partners has successfully acquired and integrated the Marysville NGL storage facility, the Chesapeake wholesale propane terminal and the Black Lake NGL Pipeline. “We continue to view our diverse geographic footprint as a strong positive, as it provides us with access to multiple resource plays, contract types, and customers,” Borer said.

Future Growth Opportunities

For the past four years, DCP Midstream has been ranked by Midstream Monitor’s annual rankings as the largest NGL producer in the United States. The company is now seeking to leverage this strength to reposition the company from being gathering- and processing- centric to being a full NGL value chain midstream service provider.

“This repositioning created additional NGL infrastructure opportunities such as the Southern Hills and Sand Hills NGL pipelines, which represent more than $2 billion of investments in projects with attractive fee-based earnings,” Borer said. “Those pipelines have also created a platform for additional growth going forward, as the NGL logistics needs of the industry continue to grow.”

As producers continue to focus on liquids-rich plays, DCP Midstream Partners is looking at adding new well connects to existing assets in regions with increased production activity.

These liquids-rich growth opportunities will have a large focus on the company’s Seabreeze and Wilbreeze pipelines with increased volumes from the Eagle Ford. The Wattenberg pipeline is also experiencing growth due to increased production from the DJ Basin.

The company also anticipates realizing growth opportunities through the Discovery Pipeline for fee-based gathering volumes while the Marysville storage facility is expected to experience increased volumes from refiners and petrochemical operators in Sarnia, Canada. “We are in active discussions with various Sarnia market participants regarding storage expansion opportunities associated with NGL takeaway solutions for the Marcellus and other emerging shale plays in the area,” Borer said.

The bulk of the company’s growth in the next few years will remain focused on co-investments. The Partnership is eyeing more than $600 million of such opportunities with its general partner in 2012 and more than $1 billion annually in 2013 and 2014 with the Southern Hills and Sand Hills pipelines ultimately residing fully within the Partnership.

Further growth will come in the form of organic expansion and bolt-on acquisitions, which are expected to account for approximately $100 million annually. In 2012, these opportunities are expected to be even larger at $250 million to $300 million.

Contact the author, Frank Nieto, at fnieto@hartenergy.com.