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MLP M&A: What’s the Deal?

By Peter Staas on Jan. 15, 2018

In recent years, much of the merger and acquisition activity involving master limited partnerships (MLP) has focused on asset sales and purchases.

On the sell side, the number of transactions and total value of deals have jumped over the past few years, as distressed MLPs monetize noncore infrastructure in an effort to shore up their balance sheets and redeploy the proceeds from these high-multiple sales into lower-multiple growth opportunities.

(Click graph to enlarge.)MLP Asset Sales

This trend accelerated in 2016 and 2017, when MLPs that took on too much leverage during the salad years of the shale oil and gas revolution were forced to take their medicine. Plains All-American Pipeline LP (NYSE: PAA) and Williams Partners LP (NYSE: WPZ), for example, have been active sellers in recent years.

And if you exclude Energy Transfer Partners LP’s (NYSE: ETP) asset sales to sister MLP Sunoco LP (NYSE: SUN) in 2015, the total value of non-upstream divestments announced by MLPs falls to $1.5 billion. Removing these transactions from the 2014 data set reduces the total value to about $380 million.

This paucity of asset sales—again, excluding the wheeling and dealing between members of the Energy Transfer family—perhaps reflects a business model focused on paying out substantially all of an MLP’s cash flow and maximizing distribution growth. This philosophy doesn’t incentivize active portfolio management, with far too many operators holding on to legacy assets in out-of-favor basins instead of monetizing these properties.

We expect these asset sales to continue in 2018, though the pace may moderate now that many MLPs have taken enough medicine to put themselves on a sustainable path.

Ever since Energy Transfer Equity LP’s (NYSE: ETE) hostile takeover of Williams Companies (NYSE: WMB) fell through, investors have wondered about the next blockbuster deal in the MLP space and the potential for a wave of consolidation after a period when the number of publicly traded partnerships swelled.

(Click graph to enlarge.)
MLP Universe

But most of the blockbuster transactions that have occurred since oil prices began to weaken in the second half of 2014 have involved simplification transactions where the general partner buys out the MLP to remove burdensome incentive distribution rights and (often) effect a stealth payout cut to put the entity on a sustainable path.

Kinder Morgan (NYSE: KMI) kicked off this trend in fall 2014, splashing out $59.157 billion to roll up Kinder Morgan Energy Partners LP and El Paso Pipeline Partners LP. Valuation premiums on these transactions have ranged between 10 and 20 percent.

The most recent transaction in this category—Archrock’s (NYSE: AROC) purchase of compression services provider Archrock Partners LP (NSDQ: APLP)—involves a roughly 55 percent distribution cut, though the 22 percent premium and guidance for annual dividend growth of at least 10 percent softens the blow a bit.

Other names that could pursue simplification transactions include Energy Transfer Equity LP and Energy Transfer Partners LP (NYSE: ETP), EnLink Midstream LLC (NYSE: ENLC) and EnLink Midstream Partners LP (NYSE: ENLK), Western Gas Partners LP (NYSE: WES) and Western Gas Equity Partners LP (NYSE: WGP), and EQT GP Holdings LP (NYSE: EQGP) and EQT Midstream Partners LP (NYSE: EQM).

Not all of these pairings need to go down this route immediately, while some will come from a position of relative strength and won’t require as severe of a distribution cut.

Energy & Income Advisor subscribers can read our analysis of these different scenarios in MLPs: Review and Outlook, along with our top takeover picks in the MLP space.

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