MergerMarket
* Take-private deals likely
* Diverse pool of hopeful bidders for assets
* Corporate M&A needs market stability first
Facing challenging commodity prices and volatile capital markets, midstream master limited partnerships (MLPs) will turn to mergers, divestitures and ultimately acquisitions to address capital needs or simply to survive, industry sources say.
“The world doesn’t need 112 MLPs,” said Peter Bowden, managing director and head of midstream/MLPs, for Jefferies, speaking on 18 February at the Infocast 10th Annual Midstream Conference in Houston. Some will likely fail while others will be consolidated, he said. High-quality MLPs with strong sponsors will be the most likely acquirers, he said.
Generous capital markets enabled anyone “who could spell MLP” to raise capital, joked Jim Teague, CEO of Enterprise Products (NYSE:EPD), speaking on a panel at IHS CERAWeek in Houston last week. Enterprise is not looking to consolidate, Teague clarified.
Other executives take a different view. Consolidation could help resolve the current overbuilding and underutilization plaguing midstream infrastructure, said Greg Armstrong, CEO of Plains GP Holding (NYSE:PAGP) and Plains All American (NYSE:PAA), speaking on the same CERAWeek panel.
The MLP space will likely see “massive consolidation” between MLPs or take-backs to the parent, said Gregory Ebel, chairman, president and CEO of Spectra Energy (NYSE:SE) and Spectra Energy Partners (NYSE:SEP), also speaking during CERAWeek.
In August, Spectra was pegged as a potential suitor for Williams Companies (NYSE:WMB), which is in the process of being acquired by Energy Transfer Equity (NYSE:ETE).
To be sure, MLPs will look at all their financing options before parting with assets or consenting to a sale. On 27 January, Mergermarket outlined some of the capital-raising alternatives for MLPs, such as cutting distributions, securing financing from sponsors or selling preferred equity. An increasing number of MLPs are running out of options, however, and could become targets.
Potential sellers include MLPs that are struggling to survive in the current environment. Southcross Energy (NYSE:SXE) has seen its shares fall more than 96% from their 52-week high. Its market cap stands at USD 37.5m. Ownership of Southcross’s general partner is roughly divided between three private equity firms: Charlesbank Capital Partners, EIG Global Energy Partners and Tailwater Capital, according to regulatory filings.
Southcross is just one of as many as 20 MLPs that could “end up on the pink sheets,” said a first industry investor. The company received a continued listing notice on 19 February for trading below USD 1 over the preceding 30 trading-day period. The company has six months to regain compliance.
Beaten-down MLPs unable to tap the equity or debt markets could become “zombie” MLPs that are unable to execute their business strategy, said the industry investor and a first sector advisor.
Take-private plays
MLPs that can no longer serve the function they were created for could be potential take-private candidates, said Hinds Howard, SVP and associate portfolio manager at CBRE Clarion. In 2009, the Bakken-focused MLP Hiland Partners was taken private by Harold Hamm, also owner of Continental Resources (NYSE: CLR).
Ownership of the general partner will be key to any MLP take-private strategy, said Jeff Jorgensen, SVP, Center Coast Capital, noting that Hamm owned the GP of Hiland Partners himself.
A private equity executive and second sector advisor agreed that the current market creates take-private opportunities. The second sector advisor added that reverse mergers would be the flip side of the same coin.
In that case, a weakened public MLP could be a takeover target for a strong private company that would lead to a merged entity with a higher public valuation “over time.”
The first sector advisor said that most of the PE sponsors that own general partners that own MLPs have already looked at take-private scenarios. While the math “would seem to work”, factoring in the costs of taking the company private and then taking it public again at a later date means “it’s just as cheap if not cheaper to just wait it out,” the first sector advisor said.
Asset sale option
Public MLP valuations have fallen drastically — the Alerian MLP Index is down 45% from its 52-week high. But valuations for underlying midstream assets themselves remain relatively attractive, sources say. MLPs willing to part with assets will find a ready pool of buyers.
Canadian pension funds, sovereign wealth funds and even Asian investors would like to buy North American infrastructure, said the second sector advisor.
Mergermarket reported on 5 February that private equity stands by as willing buyers and partners. On 19 February, this news service also reported that utilities are targeting MLPs, and hungry for acquisitions.
MLPs themselves could be both buyers and sellers of assets. In July 2015, Enterprise Products sold its offshore Gulf of Mexico system to Genesis Energy (NYSE:GEL) for USD 1.5bn while purchasing midstream gathering assets in the Eagle Ford from upstream producers Reliance and Pioneer Natural Resources (NYSE:PXD).
Enterprise’s willingness to sell assets is one reason the company has weathered the current storm better than other MLPs, said Aaron Blomquist, managing director, Tudor Pickering Holt, speaking during the Infocast 10th Annual Midstream Summit on 18 February.
Corporate deals coming later
With public market valuations down and capital markets closed, undertaking an acquisition would present challenges to most MLPs. In addition, investor sentiment is an obstacle as investors have punished risk-takers, including Energy Transfer Equity in its bid to acquire Williams Companies.
Unit valuations for Energy Transfer Equity are down 69% and Williams Companies are down 59% since the deal was first announced.
Deals will not likely begin to happen until there is greater stability in the MLP markets, said Hugh Babowal, managing director of energy M&A, Wells Fargo Securities, speaking at the Infocast 10th Annual Midstream Summit. Standard volatility for the S&P 500 is about 1-2% per day, while the Alerian Index has seen many days with volatility as high as 10%, he said. Until volatility flattens out and stock valuations improve, “it’s difficult for boards to stick their necks out,” he said.
Plains All American’s Armstrong asserted that the next 120 days will be the “most painful” the MLP has experienced in the last 30 years, but that the industry should begin to recover after that, and was hopeful consolidation would help play a role in that recovery.