* Investors from Asia, Mideast, Australia, eye pipelines
* Attracted by pipelines' steady cash flows, dollar assets
* Trump's promised policies could stir buying
(Adds more details about tax considerations, paragraph 12)
By David French
HOUSTON, March 9 Foreign institutional
investors, including sovereign wealth funds, are studying
investments in the U.S. interstate oil and gas pipeline network
as a way to obtain recurring returns in a low interest-rate
Dealmakers said they are advising funds, including from
Asia, Australia and the Middle East, about potential investments
that could bring billions of dollars of new capital to the
Other infrastructure areas also have attracted institutional
investors. Drawn to the potential for steady long-term incomes,
they have purchased stakes in companies operating toll roads,
airports and utilities.
Peter Bowden, co-head of energy investment banking at
Jefferies Group LLC, said major pipelines with
long-term contracts structured as take-or-pay deals from
creditworthy shippers are most attractive to foreign buyers.
Under take-or-pay, a firm wanting to use the pipeline agrees
to move a certain amount of hydrocarbons for a fixed price but
pays a separate penalty price for every barrel of oil equivalent
not subsequently transported.
"These assets are dollar-denominated, so if you’re a
non-dollar-denominated fund looking for dollar assets and
infrastructure with a return that will beat inflation, they are
the equivalent of the best bond you can buy," Bowden added.
The entry of deep-pocketed foreign institutional investors
to pipeline sale processes has added heightened competition to
domestic capital already chasing a finite pool of assets,
according to dealmakers.
"When assets come up, there is usually a bit of a frenzy
that puts upward pressure on the acquisition premium," said one
energy attorney who spoke on condition of anonymity.
These funds are exploring two main investment routes. One
approach is to buy a project directly through a joint venture
with other partners.
The preferred option, however, is providing funds to
projects and their developers, typically energy or
private-equity firms. This approach helps to overcome two
potential hurdles to such transactions: tax liability, and a
review by the Committee on Foreign Investment in the United
States (CFIUS) for non-American owners.
CFIUS is a government body that adjudicates on deals when
there are potential national security implications for an
overseas party owning an American company. Such national
security objections prompted China National Offshore Oil Corp
to withdraw its $18.5 billion bid for California's
Unocal Corp in 2005.
Outright purchases by foreigners also raise tax
considerations, since pipelines fall under the Foreign
Investment in Real Property Tax Act (FIRPTA). Non-American
owners are unable to minimize their tax bill by structuring a
deal as a Master Limited Partnership (MLP). Foreign companies
may have to pay an income tax of up to 15 percent on the asset,
in addition to other taxes that an MLP company would not have to
Dealmakers said more foreign entities could start buying
directly into pipeline projects as a number of factors converge
to eliminate such obstacles.
Structuring an investment to address the tax implications is
already fairly straightforward, according to an energy lawyer.
The election of President Donald Trump, and his promised
wave of deregulation, is expected to reduce CFIUS objections to
transactions. One dealmaker noted the pending purchase of the
Port Arthur refinery, the largest in the United States, by Saudi
Aramco had not triggered any CFIUS actions. That
deal is on course to close in the second quarter.
Infrastructure needs in certain regions of the country
should also provide opportunities for further capital
deployment, said Osmar Abib, global head of oil and gas, global
energy investment banking, at Credit Suisse who spoke
on the sidelines of the CERAWeek energy conference in Houston.
Trump has pledged to spend $1 trillion on infrastructure,
with much of the capital coming from the private sector.
One area of focus, dealmakers said, could be in the U.S.
Northeast, where a bottleneck in the pipeline network prevents
gas generated by shale fields including the Marcellus from being
(Reporting by David French; Editing by David Gregorio)