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  • Roger S. Conrad

Midstream IPOs: Rockin’ the Bakken

By Peter Staas on May. 30, 2017

In an environment where energy prices remain lower for longer and short-cycle US onshore plays take market share, midstream master limited partnerships (MLP) with the best growth prospects remain some of our favorite picks.

The pace of initial public offerings (IPO) in this space has slowed considerably in recent years, reflecting a challenging tape that raised questions about whether this route still represents the best way to monetize energy assets.

Gone are the days when all manner of energy-related assets ended up in the MLP structure, regardless of their cyclicality and the sustainability of their cash flows.

Oil-field service outfit Mammoth Energy Services (NSDQ: TUSK), for example, rightly opted to make its debut as a C-corporation after initially filing to debut as an MLP—a bid to piggyback off the initial success of Hi-Crush Partners LP (NYSE: HCLP) and Emerge Energy Services LP (NYSE: EMES), proppant producers that did away with their distributions when market conditions soured.

Meanwhile, distribution cuts by blue-chip MLPs such as Kinder Morgan Energy Partners LP, Energy Transfer Partners LP (NYSE: ETP), Williams Partners LP (NYSE: WPZ) and Plains All-American Pipeline LP (NYSE: PAA) likely scared off some investors—or at least made them more discerning.

The market also soured on drop-down stories where a sponsor creates an MLP as a vehicle to monetize midstream assets at favorable valuations while retaining control of this critical infrastructure.

The sharp selloff in MLPs that occurred in late 2015 and early 2016 served as a reminder that many of these structured growth stories depend on a partnership’s ability to access capital at favorable rates. With bond and equity yields surging, some drop-down MLPs’ growth stories ground to a halt.

Investors also chafed at some MLPs’ willingness to issue equity publicly to fund asset deals; the market regarded these transactions not as a show of strength during a period of turmoil, but as a sign that the sponsor’s goals may not be aligned with the partnership’s unitholders.

The value proposition associated with drop-down transactions has also changed dramatically over the past decade, with assets selling for higher valuations today and, in some instances, offering fewer near-term opportunities for organic growth.

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