Power Lunch Byte with John Sherman of Inergy

Kansas City-based Inergy  announced a merger with Houston-based energy firm Crestwood. The deal creates a $7 billion company. John Sherman of Inergy appeared on Kansas City Power Lunch to talk about it.

Krista Klaus: For those of us outside the industry this news came as a big surprise. What are the reasons behind the merger?

John Sherman: Both Inergy and Crestwood are in the same business although we have complementary strengths in different sectors of that business. Really, I’m talking about the midstream energy space, which is really booming now with all of this shale oil development. It’s creating the need for infrastructure, logistics assets and companies with the expertise to build those out. I think both of our companies were trying to do the same thing, trying to get size and scale because size matters in this business. There’s going to be lots of investment in this next decade, so you need to be large, be able to access large amounts of capital and be competitive. This gives both of us size and scale, more diversity, more growth, and for us, and I really think for both companies, we also add depth to the management team. So, this was really one of those classic deals where two plus two equals five. There’s no overlap. These are very complementary businesses.

We get them in three businesses they’re currently not in today, and they get us into natural gas gathering and processing, which is the highest-growth segment of this industry, and it’s an industry we’ve been trying to get into for some time.

KK: So Crestwood is closer to the supply end of things and Inergy is closer to the distribution side?

JS: I would say that’s accurate. They’re closer to the wellhead, we’re kind of closer to the burner tip, and that’s really where what we call the midstream business takes place. It’s pipelines. It’s storage. It’s transportation, truck and rail.

KK: I’ve heard shale gas exploration described as the next gold rush. How important is it that companies like Inergy team up with partners in order to remain competitive?

JS: It’s extremely important, and I think the gold rush comment is accurate. I’m a little biased here, but I think it’s one of the most exciting things going on in American business today. If you think about 10 years ago, we thought we were running out of natural gas. Smart people were building import terminals. We thought we had about 10 years of reserves left in the ground. Today, due to the technology and ingenuity of our industry and the entrepreneurs that really got out there and are building it, we now have more than 100 years of reserves. And those same smart people are spending billions of dollars to turn those terminals around potentially to export around the world.

KK: I think there was a perception when this story broke that Crestwood was buying Inergy, but you have more characterized it as a merger of equals.

JS: It is a merger of equals. The lawyers can tell you who’s buying who, but this is really a combination that creates a $7.5 billion enterprise that will be in every major shale play in North America in both natural gas storage and transportation, natural gas liquids, crude oil logistics and the gathering and processing business, which is what we picked up from the Crestwood team.