Prevailing weakness and uncertainty in the energy sector favors blue-chip master limited partnerships that own indispensible infrastructure to transport hydrocarbons to various end-markets.
These backbone systems, which collect volumes from a wider area, entail less exposure to an individual producer’s weakness and generate reliable cash flow.
Industry heavyweights such as Enterprise Products Partners LP (NYSE: EPD) also boast extensive asset bases that offer geographic and customer diversity, providing a degree of insulation against challenges in a particular basin or business line or a cash-strapped producer scaling back activity.
Industry heavyweights with extensive midstream infrastructure also stand a better chance of unlocking value in a market where merger and acquisition activity has heated up.
Cash-strapped producers have sought to raise capital and support drilling activity by divesting their midstream infrastructure, as the multiples associated with these deals makes them a much more attractive option than issuing additional equity or tapping the debt market.
Kinder Morgan (NYSE: KMI) earlier this year announced the acquisition of Continental Resources’ (NYSE: CLR) midstream assets in the Bakken Shale, while Pioneer Natural Resources (NYSE: PXD) has put its gathering and condensate handling assets in the Eagle Ford Shale up for sale.
These systems, supported by valuable acreage dedications from leading producers, will fetch premium prices that only industry heavyweights can afford.
Private-equity outfits have also invested huge sums in midstream infrastructure over the past several years. Recent deal flow suggests that these investors increasingly prefer to monetize these positions without going through the expense and uncertainty of an initial public offering (IPO).
One strategy involves acquiring the general partner of a marginal MLP, usually one that originally came into being from a private-equity backed IPO of gathering and processing assets.
These struggling names, suffering from their lack of scale and exposure to commodity prices, are often ripe for an infusion of new assets.
Deals in this vein include Texstar Midstream Partners LLC’s acquisition of a general-partner interest in Southcross Energy Partners LP (NYSE: SXE) and Azure Midstream Energy LLC’s acquisition of Marlin Midstream Partners LP’s (NSDQ: FISH).
But with the universe of MLPs that could benefit from such a transaction shrinking, investors can expect to see more private-equity firms monetizing their midstream holdings by selling these assets outright.
Consider the case of Coronado Midstream Holdings LLC, a privately held outfit that owns gas-gathering and -processing assets in the Permian Basin, a mature region in West Texas that’s been revivified by horizontal drilling and hydraulic fracturing.
In November 2014, Coronado Midstream announced that the firm had filed a confidential initial registration statement with the Securities and Exchange Commission—the first step toward an IPO.
The company’s private-equity and upstream owners evidently had a change of heart; Enlink Midstream Partners LP (NYSE: ENLK) in February 2014 announced the $600 million acquisition of Coronado Midstream
The MLP space itself is also ripe for consolidation. Thus far, the action has focused primarily on gathering and processing names—Atlas Pipeline Partners LP, PVR Partners LP QEP Midstream Partners LP and Regency Energy Partners LP—in part because this link in the energy value chain has been hit the hardest by the fall in NGL prices.
That Atlas Pipeline Partners attracted bids from eight different players speaks to the industry’s appetite for mergers and acquisitions to drive growth.