Membership of parents and exits from the EP

Summary

  • Consolidation of MLPs by their parents or significant owners is a multi-year trend, but activity has picked up with a number of deals currently underway.
  • Industry peer-to-peer M&A activity has generally been more muted compared to MLP consolidations by sponsors, but there have been a few recent examples of acquisitions in the MLP space.
  • Private equity outflows from past investments could continue to provide inorganic growth opportunities for midstream companies.

On a recent webcast, investors asked several general questions about energy infrastructure mergers and acquisitions. With this topic clearly hot for investors, today’s note provides an update on M&A activity in the midstream/MLP space, including consolidation of MLPs by parent companies, MLP acquisitions and recent transactions with private equity players.

MLP parent/sponsor consolidation resumes.

Consolidation of MLPs by their parents or significant owners is a multi-year trend that peaked in 2018-2019 but continued in subsequent years. While the motivations for these transactions have varied, most transactions in the past have focused on simplifying the structure (Read more). Parent buyouts today may in some cases reflect the evolving business model and changes in capital markets that have prevented parents from using MLPs for their original purpose of generating cash for the parent company by selling its assets to the MLP. These “drop-down MLPs” have typically had parents that were a refiner, producer, or large integrated company, which tend to trade at a lower EBITDA multiple than mid-tier MLPs. In other words, midstream assets are given a higher valuation in an MLP than in big business, which was also part of the rationale for creating the MLP in the first place.

There have been several recent examples of parents offering to buy their MLPs, including some deals that are expected to close imminently. Earlier this month, Shell Midstream Partners (SHLX) announcement receipt of an offer from Shell Pipeline Company LP to purchase the remaining SHLX units that it does not already own. The proposed takeover follows similar announcements from Phillips 66 (PSX)/Phillips 66 Partners (PSXP) and BP (BP)/BP Midstream Partners (BPMP). Acquisitions of PSXP and BPMP should be completed this quarter. Sprague MLP Resources (SRLP) has received an offer last month from Hartree Partners, which owns 74.5% of SRLP’s limited partnership stake, to acquire the remaining shares of MLP. In October 2021, Ergon announcement a non-binding proposal to purchase the outstanding common and preferred shares of Blueknight Energy Partners (BKEP) that it does not already own. For context, Ergon made a similar proposal in August 2019 which was withdrawn the following month.

MLP consolidation not limited to transactions with parents.

Outside of interfamily consolidation, there have been a few examples of mergers and acquisitions within the MLP space that have combined complementary asset footprints, creating cost and operational synergies. On February 1, Crestwood Equity Partners (CEQP) announcement the closing of its acquisition of Oasis Midstream Partners, which expands CEQP’s presence in the Permian Delaware Basin and Williston Basin in Montana and North Dakota. Energy Transfer (ET) strengthens its position in Oklahoma and the Ark-La-Tex region with its acquisition from Enable Midstream Partners in December 2021.

Industry peer-to-peer M&A activity has generally been more subdued compared to MLP sponsor consolidations. With significant free cash flow generation in the midstream and increased M&A activity by oil and gas producers in recent years, investors have wondered why there aren’t more deals. of consolidation in the intermediate space. For energy assets in general, volatility in commodity prices can complicate valuations and make it harder for buyers and sellers to agree on a price. For the midstream sector, M&A activity can be complicated by significant parent or insider involvement. Enable Midstream and Oasis Midstream had parents with significant holdings, although OGE Energy (OGE) and CenterPoint Energy (CNP) were contemplate strategic alternatives for Enable for some time. Transactions could also be complicated by regulatory oversight and heightened scrutiny of anti-competitive agreements.

Private equity transactions create opportunities for growth.

M&A activity with private equity has provided inorganic growth opportunities for some midstream companies as private players seek to monetize their investments. Altus Midstream (ALTM) is combine with EagleClaw’s private parent company Midstream in an all-stock transaction, and upon closing, the company change its name to Kinetik (new ticker KNTK). The shares issued to Blackstone and I Squared Capital will be subject to a 12-month lock-up agreement. Enterprise Product Partners (EPDs) acquired Navitas Midstream, which was backed by Warburg Pincus, in a $3.25 billion all-cash transaction that closed last week. The acquisition gives EPD a foothold in the Permian Midland Basin, where Navitas had natural gas gathering and processing assets. Last month, Targa Resources (TRGP) redeemed Stonepeak’s interest in a joint venture formed in 2018, the transaction is expected to contribute to EBITDA growth in 2022. In October 2021, Enbridge (ENB) acquired Moda Midstream, namely the Ingleside export terminal and related infrastructure, for $3 billion. Given the significant involvement of private equity in the midstream industry in previous years, past investment outflows could create growth opportunities for midstream companies.

What does this mean for investors?

MLP consolidations by parent companies, privatization deals and other M&A activity have had a significant impact on the North American energy infrastructure universe in recent years, as shown in the chart below. Since the end of 2015, the number of companies in the universe has almost halved, but the total market capitalization at the end of 2021 was relatively in line with the 2015 level. MLPs still represent the largest share of the universe in terms of market capitalization, but US and Canadian companies now hold a much larger share. For space-investing investors who want broad exposure to the universe, a fund or exchange-traded product with MLPs and companies is likely to be more attractive than an MLP-focused product. However, investors who are primarily looking for a tax-efficient return will likely be more interested in an MLP-focused product (Read more).

Initially published by Alerian on February 22, 2022.

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