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MLPs: Review and Outlook

By Roger S. Conrad on Dec. 31, 2017

Mergers & Acquisitions

Over the past 12 months, much of the merger and acquisition activity has focused on asset purchases, with distressed operators such as Plains All-American Pipeline LP (NYSE: PAA) monetizing 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. This trend looks set to continue, though the pace may moderate.

Plains All-American Pipeline and NuStar Energy also made big splashes in the Permian Basin, with expensive acquisitions of established gathering systems serving high-quality producers that should be able to grow their output rapidly in coming years. These transactions involved extremely high multiples, with the buyers expecting to offset this hurdle with above-market volumetric and cash flow growth. The next 12 months could bring similar deals, with a few private equity-backed gathering systems reportedly on the market.

Elevated yields and a difficult equity market haven’t deterred MLPs that rely primarily on drop-down transactions from completing deals, with names limiting public equity issuance by pursuing private placements with sponsors and other third parties. Some have also issued preferred units, though this practice occurs with greater frequency among names with stretched balance sheets.

Some sponsors have also lowered the valuation multiples on recent deals to levels that can compete with some organic growth opportunities. Shell Midstream Partners LP (NYSE: SHLX), for example, paid Royal Dutch Shell (LSE: RDSA, NYSE: RDS A) 7.9 times operating cash flow for five product terminals and incremental interests in various offshore and onshore pipelines. We prefer drop-down stories involving sponsors with the wherewithal and willingness to make these adjustments.

This transaction, coupled with Shell Midstream Partners’ purchase of a 50 percent equity interest in the Delaware Basin’s Nautilus gas-gathering system at a discounted valuation (4.7 times expected operating cash flow over the next 12 months), has restored our faith in a name that we had started to question.

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