This article is provided to FT.com readers by mergermarket—a news service focused on providing actionable, origination intelligence to M&A professionals. www.mergermarket.com
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Though they are seldom seen and difficult to arrange, mergers between master limited partnerships may become more common in the next 12 months, industry sources interviewed by mergermarket said. The market has become crowded with players competing for the same assets, growth opportunities have diminished and many are facing difficulties accessing capital.
Historically there have not been many MLP mergers because every combination requires four parties - two limited partners and two general partners - to ”split the pie,” explained Patrick Diamond, Vice President at Plains All American Pipeline.
But Houston-based Plains is one midstream MLP that has engaged in mergers and plans to seek more consolidation opportunities. Greg Armstrong, CEO, noted in an earnings call that the number of MLPs has increased from around 15 in 1998 to more than 70 today, and the market is expected to contract.
Another keen buyer is Energy Transfer Partners (ETP), based in Dallas, Texas. Kelcy Warren, CEO, noted in an interview that partnerships with credit ratings below investment grade can not access capital, and therefore could become targets. Those entities that are heavily weighted in processing assets, which are more exposed to fluctuations in commodity prices, could also be vulnerable, he said.
One company heavily weighted in processing and with speculative grade debt is Houston-based Targa Resources, a midstream partnership that attempted a merger with MarkWest Energy Partners last year. Rene Joyce, CEO of Targa, said he expects to see MLP consolidation, but agreed that this type of transaction is difficult to achieve.
The master limited partnership (MLP) is a listed company that does not pay income tax and makes cash distributions to its unit holders. Most MLPs are midstream companies, but many upstream groups were also formed in the last few years. Because it pays out all its free cash flow, the MLP also relies on the capital markets to be able to fund acquisitions.
Groups of particular concern are those that need acquisitions to maintain distributions, said Donald Kendall, CEO of the private equity investment firm Kenmont Capital Partners. Houston-based Genesis Energy, a midstream MLP whose largest shareholder is listed Denbury Resources, could be a target in the space. According to a recent UBS analyst report, Genesis must make third-party acquisitions to grow, and may find it difficult to do so given the current capital market conditions.
An industry investor and a lawyer cited Waltham, Massachusetts-based Global Partners, one of the smallest companies in the space, as an ”easy tuck-in” for a larger buyer. Master limited partnerships that are largely private equity-held will be other likely sale candidates, according to an energy finance source. ”Look for MLPs with a large stake owned by a PE fund,” he said. ”They will be looking for an exit.”
The industry lawyer agreed that the sector could see more consolidation of midstream players. ”External growth opportunities have diminished and if we see greater differentiation between unit price,” he said, ”it could happen in the next 12 months.” However, mergers between exploration and production MLPs like Linn Energy and BreitBurn Energy Partners are less likely, he said.
Both buyers and sellers are needed for consolidation to happen, but there are few natural buyers for upstream MLPs, a Canadian banker said. Established upstream partnerships, which operate primarily low-risk and long-lived producing properties, are more likely to buy assets than other operating companies, a second banker said. The market is also not mature enough for consolidation, said Steven Pruett, CEO of Legacy Reserves, based in Midland, Texas.
Another common thought is that any group with a low distribution coverage ratio, namely 1.2 or less, may be in a tight situation, according to an industry executive, the lawyer and the industry investor. A higher coverage ratio provides a cushion for the business, in case of unexpected events or changes in commodity prices.
Crosstex Energy, a Dallas-based midstream partnership that has not previously engaged in a corporate merger, agrees the sector may contract. COO Bob Purgason said, ”We’re trying to position ourselves to be ready when that consolidation trend starts, and to be in the middle of it, but it is anybody’s guess what’s going to kick it off.”
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