A rapid influx of master limited partnerships (MLPs) and expansion projects to serve the US shale plays increased global midstream mergers and acquisitions (M&A) transactions by 16% above 2012 transaction values to nearly $62 billion (B), according to IHS.
This $62 B midstream deal value in 2013 was an all-time high, if you exclude the extraordinary $32 B midstream portion of the $41 B Kinder Morgan/El Paso transaction in 2011 that elevated transactions to more than $78 B, said Cynthia Pross, midstream transactions analyst at IHS Energy and principal author of the IHS Herold Year-End 2013 Midstream Transaction Review. There is no reason to expect this upward trend to wane in the next several years as the pool of midstream assets continues to grow in response to shale play expansion.
According to the IHS review, midstream assets, which include gas and oil gathering and processing facilities and pipelines as well as oil tankers, LNG vessels and diversified holdings, reached $62 B from 54 deals with values exceeding $10 million of which 14 of these deals were at the multi-billion dollar level.
MLPs were responsible for nearly two-thirds of midstream total transaction value and 7 of the 10 largest deals in 2013. Drop-down transactions that moved assets from midstream operating companies to MLPs as a tax-advantage strategy were the major contributors to the 2013 transaction value.
The largest midstream deal in 2013 was Spectra Energy Corp.s $11B drop-down sale of its remaining US pipeline and storage assets to Spectra Energy Partners LP. Kinder Morgan Inc. also dropped down $1.7 B in diversified midstream assets it acquired in 2011 from El Paso to Kinder Morgan Energy Partners LP to generate cash to pay down debt associated with the acquisition.
Total gathering and processing transaction value rose to a five-year high in 2013 and accounted for 45% of the total global midstream deal value in 2013. These transactions increased 28% year-over-year, with 47% of the total deal value contributed by six corporate-level deals.
MLPs acquired more than $27 B of the nearly $28 B in gas and oil gathering and processing assets to increase distributions to their limited partners. These transactions were spread over 12 US shale plays.
Said Pross, MLPs used the M&A market to rapidly expand their geographic footprint in developing shale plays or to gain operational synergies by adding assets in locations where they already operate.
While the number of MLPs continues to grow, the IHS report noted, several are emerging as dominant players in the sector through multiple asset acquisitions or significant corporate mergers. Energy Transfer Equity LP has been very active in midstream sector M&A, particularly since 2011, and contributed almost 20% of total midstream transaction value in 2013.
Its largest transaction in 2013 was the $5.5 B agreement by its partially owned Regency Energy Partners LP to merge with PVR Partners. It also sold $3.8 B in assets from its earlier Southern Union and Sunoco acquisitions to its affiliated Energy Transfer Partners. Crestwood Energy Partners LP and Inergy Midstream entered into a $2.2 B merger agreement. The deal created a combined MLP to be called Crestwood Midstream Partners LP, with an expanded portfolio of midstream services and an enterprise value of about $8 B.
Kinder Morgan Energy Partners LP also expanded its portfolio of midstream services in 2013 by entering into the tanker business, agreeing to acquire two tanker companies that transport crude and refined products within the US market. The $962 million cash deal was struck by affiliates of the Blackstone Group and Cerberus Capital Management.
Pross said Integrated oil companies (IOCs) have also been active in midstream M&A, divesting midstream operations to free up capital for upstream investment or spinning off midstream operations into an MLP.
Repsol sold its non-North American liquefied natural gas (LNG) business to Shell for $5.4 B as part of its plan to divest assets to reduce debt following the nationalization of YPF, and to fund expanding upstream operations. The transaction allowed Shell to further solidify its dominance in the global LNG market by expanding its geographic footprint.
Total S.A. continued its $15 B to $20 B asset sale program to fund upstream development with a $3.3 B agreement to sell its French gas transport and storage business, TIGF, to a consortium led by Italian midstream company Snam.
Other announced midstream divestments included QEP Resources plans to spin off its midstream unit, QEP Field Services Company; and Devon Energys announcement that it plans to form a publicly traded midstream MLP by combining its midstream assets with Crosstex Energy in a $4.8 B transaction. The selection of the Trans-Adriatic Pipeline (TAP) to transport production in Azerbaijan to markets in Europe led several global IOCs, including BP and Total, to exercise their options to acquire interests in the pipeline.
Private equity firms were also active in the midstream in 2013, acquiring over $1 B in assets, and investing more than $2 B in capital.
Said Pross, We expect midstream transaction value to remain at high levels for several years as the universe of assets grows with the build-out of the US midstream grid, as IOCs and exploration and production companies spin off assets into separate entities to free capital, and as shale plays continue to be developed on a global basis in areas that lack sufficient midstream infrastructure.