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Love Among The Ruins? The Prospects For MLP M&A

By Peter Staas on Mar. 25, 2018

Despite oil prices that have remained above $60 per barrel for much of the year and the recovery in US hydrocarbon production, the Alerian MLP Index has given up almost 12 percent of its value so far in 2018, beset by negative sentiment and technical headwinds.

Master limited partnerships (MLP) have sold off across the board since the Federal Energy Regulatory Commission (FERC) proposed a rule that would do away for the income tax allowance for interstate pipelines that operate under cost-of-service agreements.

Although this policy shift would result in tariff reductions for only a handful of MLPs, the ruling gave investors yet another reason to head for the exit, even if fundamentals continue to improve and many names have put themselves on a sustainable path by reducing distributions and leverage.

Amid all this panic, confusion and other emotions, NuStar Energy LP’s (NYSE: NS) proxy statement related to its takeover of its general partner, NuStar GP Holdings LLC (NYSE: NSH), got somewhat lost in the shuffle.

NuStar Energy’s recent filing revealed that Energy Transfer Equity LP (NYSE: ETE) had sent a letter offering to purchase NuStar GP Holdings LLC for $14.70 in cash—a roughly 27 percent premium at the time—or a transaction that would involve cash and equity. Chairman Bill Greehey opposed the hostile takeover offer, and the conflicts committee ultimately nixed the deal.

This intrigue, which played out earlier this month, marks the first time during this cycle where an entity outside the family tried to disrupt a combination between related companies. That NuStar GP Holdings LLC received a competing takeover bid doesn’t come as a surprise.

As we explained in the MLP outlook that we published at the end of 2017, NuStar Energy LP would be a natural takeover candidate:

NuStar Energy Partners LP (NYSE: NS) trades at an enterprise value to operating cash flow (9.9 times) that’s on par with drop-down deals completed by the likes of Philips 66 Partners LP (NYSE: PSXP) and other MLPs that rely on these close transactions for growth.

A high-quality acquirer would be able to unlock value by refinancing NuStar Energy’s debt; the partnership doesn’t have an investment-grade credit rating. At the same time, NuStar Energy’s gathering system in the Midland Basin, as well as its dock and storage space in Corpus Christi, would be valuable assets for any of the MLPs competing to develop a pipeline from the Permian Basin to the area.

In this instance, management’s recalcitrance, an unwillingness to sell at a relatively low valuation and the potential loss of a regular income stream likely contributed to Chairman Greehey’s opposition to Energy Transfer Equity’s proposed takeover offer.

Despite the appeal of the NuStar Energy family as a potential takeover target, much of Energy Transfer Equity and Energy Transfer Partners LP’s (NYSE: ETP) recent wheeling and dealing has focused on deleveraging the two entities.

This motivation underpinned Energy Transfer Equity and Energy Transfer Partners’ complicated series of transactions with USA Compression Partners LP (NYSE: USAC) that ostensibly addresses the latter’s leverage and distribution coverage issues.

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