Worldwide mergers and acquisitions (M&A) transactions involving midstream energy assets, which include natural gas pipelines, gas-gathering and processing facilities, as well as tankers and diversified holdings, returned to the 2006 all-time high of $49 billion in 2010, according to results in a recent IHS Herold study.
This figure represents a 400% increase (above 2009 transaction values of $12.6 billion) in total asset deal value. According to the report, nearly all (94%) of midstream M&A activity in 2010 was driven by spending on gas pipelines and gas-gathering and processing facilities in the US. Several large transactions involving restructurings of master limited partnerships (MLPs) operating primarily in conventional US gas plays contributed more than two-thirds of 2010 total transaction value, but total transaction value for shale gas play assets was up 255% year-over-year, reaching an all-time high of more than $5 billion.
Transactions involving gas-gathering and processing facilities led the deal count with 24 deals in 2010, followed by 10 deals involving liquids pipelines and eight deals involving gas pipelines.
The midstream M&A activity in 2010 was clearly a reflection of the rapidly increasing volumes of natural gas that are being produced and brought online in the US combined with the current unfavorable economic climate for gas, said Cynthia Pross, senior analyst for M&A research at IHS. I think many of these deals indicate a desire by companies to cut costs by streamlining operations through restructuring, to improve balance sheets, and to gain increased access to capital through larger, consolidated operations. Ultimately, they want to optimize their profitability, since natural gas margins are so thin.
Ms. Pross said there were several US midstream restructurings in 2010 involving master limited partnerships. We have seen MLPs streamlining operations through acquisition of their general partners, eliminating general partner distribution requirements and using those funds for capital expenditures or to maintain distributions to MLP unit-holders.
One such example of this streamlining strategy, the IHS report noted, was evident in the largest midstream transaction in 2010, when Enterprise Products Partners, the gas-gathering and processing MLP, acquired its general partner, Enterprise GP Holdings, giving the MLP control of the $22 billion enterprise value MLP. Enterprise Products Partners has geographically diverse gas-gathering and storage assets in Texas, Louisiana, Colorado and Ohio, primarily serving conventional gas plays.
Another major restructuring and the largest gas pipeline transaction value for 2010 was Williams Companies sale of its US interstate gas pipeline and midstream business and limited partner interests in Williams Pipeline Partners, to Williams Pipeline Partners for a $11.8 billion total transaction value. This new structure frees up additional funds to direct to Williams Companies upstream exploration and production operations, and it consolidates and streamlines midstream operations, cutting operating costs. Williams Pipeline Partners has diversified US midstream operations, with major pipelines, primarily in the Rocky Mountains, that serve conventional gas plays, as well as some assets that serve unconventional gas plays in the Marcellus shale.
Aside from cost control through consolidation and a need to enhance balance sheets, Ms. Pross said, many of these companies find the M&A market a way to quickly and economically expand geographically, versus taking on extensive new construction. In particular, we have seen this in US shale plays, where we witnessed a higher deal count than those for conventional gas plays in 2010. Most of these transactions were asset-level deals that ranged from approximately $100 million to $1 billion in total transaction values.
In addition to consolidation among pipeline companies, 2010 saw integrated oil and gas companies selling midstream assets to midstream companies, allowing the seller to focus financial resources on upstream operations while simultaneously locking in long-term midstream capacity agreements with the buyer as part of the deal.Going forward, Ms. Pross said, as infrastructure continues to develop in the shale plays, we would expect to see more consolidation among players, resulting in fewer companies, but those that remain will be larger, stronger companies with bigger footprints in the shale plays. HP