In nearly April, analysts Syarifa Galeb and Vincent G. Piazza of Bloomberg Intelligence posted a strength-weakness-oppor- tunity-threat analysis of the midstream energy sector.
They concluded that the fee-based contracts that most companies rely on have insulated the industry from recent weakness in commodity markets.
No surprise there—nothing like a fee-based contract to warm the cockles of your balance sheet when prices dive.
But Galeb and Piazza also expect those low prices to drag down volumes sooner than expected. They also see more competition in the LNG exports arena as prices remain low.
“That may be counterbalanced,” they wrote, “by higher incentive distribution rights, more consolidation and asset dropdowns.”
The only $1 billion deal on this issue’s transaction list is a dropdown: EQT Corp.’s sale of its Northern West Virginia Marcellus Gathering System to EQT Midstream Partners LP (EQM), of which it is general partner. The system is designed to collect wet and dry gas in the Saturn, Mercury, Pandora and Pluto areas of development.
By the end of first-quarter 2015, EQM’s stock price was off 22% from its 12-month high of last June. Not to worry, though, because lulls are necessary to prepare for recoveries. EQM, with a market capitalization of about $5.7 billion, plans $370 million of system expansion projects over the next several years, including 100 miles of gathering pipeline and five compressor units. Analysts following the company have set target price increases of as much as 41%.
Next door to the Marcellus, Williams Partners LP used the lull to its advantage by gathering another chunk of Utica East Ohio Midstream LLC for $575 million, giving it 70% interest in the company, which offers gathering, processing, fractionation and storage assets. EV Energy Partners LP sold its 21% interest for less than the $700 million expected by Raymond James, but divesting midstream assets to pump capital into upstream operations is another trait of downturn deals. Expect more of the same throughout this year.
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