Years of delay in building new pipelines have led to Western Canada's oil production outpacing takeaway capacity and driven up demand for storage tanks.
Pembina's deal follows an unsolicited bid for rival Inter Pipeline Ltd, highlighting growing interest in the midstream business of transporting and storing crude.
The sale of Kinder Morgan Canada, whose parent is Houston-based Kinder Morgan Inc, also represents the exit of another foreign company from Canada's oil sector.
The deal "makes sense" for Pembina, said Tortoise Advisors portfolio manager Rob Thummel. It receives stable revenue streams based on fees and take or pay contracts that are insulated from volatile commodity prices
"It shows particularly in down markets, who's got quality and who doesn't. This thing’s going to be a rock through any market," said Pembina Chief Executive Mick Dilger on a conference call.
Kinder Morgan Canada shares spiked 35% reflecting the deal's premium, while Pembina shares slipped 0.4% in Toronto.
The Cochin pipeline can carry 95,000 barrels per day of U.S. condensate - an ultra-light oil - into Alberta to dilute the heavy crude it produces. Reversing that pipeline would ease constraints on Canadian export pipelines, and Dilger said the company may consider that option.
The acquisition, including terminals at Vancouver, British Columbia and Edmonton, Alberta, would make Pembina a logical operator of the Trans Mountain pipeline, which the Canadian government is attempting to expand and sell, Dilger said. But the company is not interested for now in buying the project, which has attracted fierce opposition from environmental and some indigenous groups.
"“We don’t want to subject our entire management team and reputation to all the noise that entails," Dilger said.
Pembina receives facilities to load trains with crude in Edmonton, Alberta that are co-owned by Imperial Oil Ltd, but is uncertain whether they fit with the company's business.
"We’ll have a hard look at it," Dilger said. "If either immediately or two years from now that doesn’t make sense for us, then we’ll do the right thing."
Pembina will pay C$2.3 billion ($1.73 billion) for Kinder Morgan Canada and C$2.05 billion for the U.S. portion of the Cochin pipeline system from U.S.-based Kinder Morgan Inc.
"This is the transaction the market wanted earlier this year," brokerage Credit Suisse said, adding that valuation was in line with its original expectations.
Kinder Morgan Canada had earlier explored sale options but in May decided to continue as a stand-alone entity. The company said it got Pembina's proposal two months after the review was concluded.
Shareholders of Kinder Morgan Canada will receive about 0.3068 shares of Pembina for each of their own shares, valuing Kinder Morgan Canada at C$15.12 per share based on Tuesday's close.
Kinder Morgan Inc will get about 25 million shares, or slightly less than 5%, of Pembina, which they eventually plan to convert to cash.
Pembina expects the cash consideration for the Cochin US deal to be initially funded from debt and expects to raise its monthly dividend rate by 5% or $0.01 per share, after the deal closes.
TD Securities acted as exclusive financial adviser to Pembina, while J.P. Morgan served as financial adviser to Kinder Morgan Canada. BMO Capital Markets was the financial adviser to Kinder Morgan Canada's special committee.
(Reporting by Rod Nickel in Winnipeg, Manitoba and Shanti S Nair in Bengaluru; additional reporting by Nia Williams in Calgary, Alberta; Writing by Arathy S Nair, Editing by Marguerita Choy and Patrick Graham)
By Rod Nickel and Shanti S Nair