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2 MLP ETFs in Focus on Enbridge-Spectra Energy Merger

Zacks Equity Research

The energy sector registered healthy gains on Tuesday in response to the news that midstream energy company, Enbridge Inc. ENB will acquire another potential player from the space, Spectra Energy Corp. SE. While shares of Enbridge jumped more than 5% following the news, Spectra Energy emerged as the best performer among the S&P 500 components by surging 13.4%.

Acquisition Deal in Detail

According to the deal, Spectra Energy will be acquired by Enbridge in an all stock deal worth 37 billion Canadian dollars ($28 billion). Shareholders of Spectra Energy will get 0.984 shares of the combined entity – in which Enbridge will have a 57% ownership and Spectra Energy will have the remaining 43% interest– for every common stock they hold. The deal is speculated to be closed by the first quarter of 2017 (read: Top and Flop Sector ETFs YTD).

If the deal gets implemented, the merged company, which will be known as Enbridge Inc, will emerge as the biggest energy infrastructure company in North America and one of the leading players in the space throughout the world. The enterprise value of the company will come in at as high as $127 billion. Regarding the deal, President and CEO of Spectra Energy, Greg Ebel said: "The combination of Enbridge and Spectra Energy creates what we believe will be the best, most diversified energy infrastructure company in North America , if not the world.”

What Lies Ahead?

The revenues and earnings of the two midstream companies over the 12-month period through Jun 30, 2016 were more than $31 billion and $4.4 billion, respectively. The combined firm is also believed to have solid balance sheet and enough cash flow generating capacity to finance future growth projects. President and CEO of Enbridge, Al Monaco stated "Bringing Enbridge and Spectra Energy together makes strong strategic and financial sense.” He also added that the “Transaction provides shareholders of both companies with the opportunity to participate in the significant upside potential of the combined company” (read: Energy Spending May Resume: Stocks and ETFs in Focus).

Moreover, the merger will combine two secured giant projects worth $20 billion and $37 billion that are under development. The deal will also create significant cost synergies. The joined entity will be in a position to provide 10% to 12% yearly dividend growth through 2024. Annual dividend growth in is expected to be around 15% following the merger.

MLP ETFs to Watch

Two MLP ETFs that have significant exposure to Enbridge gained significantly yesterday after the announcement of the deal. These ETFs are poised to remain on investor radar along with the two stocks in the days ahead (see all MLP ETFs here).

Global X MLP & Energy Infrastructure ETF MLPX

This product follows the Solactive MLP & Energy Infrastructure Index and holds 37 stocks in its basket. Of these, Enbridge takes the second spot with 9.1% of total assets. In terms of industrial exposure, about 92% of the portfolio is allocated to oil and gas pipeline and distribution while energy exploration and production firms have a 7% share. The fund has amassed $97.9 million in its asset base and charges 45 bps in annual fees. Volume is moderate at around 50,000 shares on an average. The ETF gained nearly 2.9% yesterday (read: 3 ETFs in Focus as Kinder Morgan's Top Line Fails to Impress).

Tortoise North American Pipeline Fund TPYP  

This ETF is designed to follow the performance of the Tortoise North American Pipeline Index. TPYP has an AUM of $34.4 million and average daily volume of 9,000 shares. Its expense ratio is 0.40%. The product holds 93 securities with Enbridge occupying the fourth position in the basket at 7.3%. From a sector look, nearly 80% of the portfolio is allocated to oil and gas pipelines and distribution while natural gas utilities take the next position at around 14%. The fund returned around 2.5% on Tuesday.

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