There’s plenty of news on the midstream front as E&Ps announce their intent to monetize gathering, processing and pipeline asset value. Potential buyers are led by private equity firms that focus on energy infrastructure and have raised substantial capital in recent years, according to a recent report from Morgan Stanley Research.
The impetus for E&Ps to make the most of their midstream assets is wrapped up in the premium valuations achieved, particularly when they are sold outright; the resulting reduced business complexity; and de-levering opportunities for E&Ps still recovering from the downturn.
Some examples are Apache, which is partnering with Kayne Anderson Acquisition Corp. to create Altus Midstream Co. around the E&P’s Alpine High holdings; Occidental Petroleum Corp., which is selling a storage and export terminal and pipelines and a gathering system to EnCap Flatrock Midstream portfolio companies; and Devon Energy Corp., which sold its ownership interests in EnLink Midstream Partners and EnLink Midstream LLC to Global Infrastructure Partners. More such deals are expected.
In a recent report, analysts from Morgan Stanley noted this monetization trend and looked at which stocks could benefit from “the E&P quest to return capital and drive material value uplift.” They noted that the Oxy deal, with its high multiples, should deliver “meaningful cash proceeds and sum-of-the-parts (SOTP) upside,” but that Apache’s deal would “do little to raise cash or alleviate ongoing capex needs.”
They identified two main factors driving potential sales of midstream holdings by E&Ps. First, independents want to bring in cash for buybacks, and now that many have sold non-core upstream assets, midstream assets are the next “prime candidates,” the analysts said.
Second, they note, midstream assets that are standalone entities generally trade at much higher multiples than upstream holdings. “However, our analysis shows that E&Ps with significant midstream exposure rarely trade at full sum-of-the-parts value. OXY’s announcement yesterday clearly highlights this disconnect, with its midstream sale transacting at about 14.4 x EV/EBITDA, while the stock trades at only about 5.0x our 2019 estimate.”
Devon’s deal with EnLink bears out the analysts’ expectation that strategic separations via outright monetizations yield the best outcome for E&P shareholders, while minimizing negative impacts to the NLP, according to the report. Spinoffs, on the other hand, “appear to often have negative initial impacts.”
For the midstream names under their coverage, the Morgan Stanley analysts’ study found that most would achieve material SOTP value upside if they sold midstream assets, “albeit with meaningful individual considerations”—but, again, they noted that Apache is an exception, as its Alpine asset deal brings in no cash proceeds. Those that appear attractive on a SOTP analysis are OXY, Anadarko Petroleum, EQT, Hess, Noble and Oasis, according to the report.
Recommended Reading
Canadian Railway Companies Brace for Strike
2024-04-25 - A service disruption caused by a strike in May could delay freight deliveries of petrochemicals.
Enterprise’s SPOT Deepwater Port Struggles for Customers
2024-04-25 - Years of regulatory delays, a loss of commercial backers and slowing U.S. shale production has Enterprise Products Partners’ Sea Port Oil Terminal and rival projects without secured customers, energy industry executives say.
Report: Crescent Midstream Exploring $1.3B Sale
2024-04-23 - Sources say another company is considering $1.3B acquisition for Crescent Midstream’s facilities and pipelines focused on Louisiana and the Gulf of Mexico.
For Sale? Trans Mountain Pipeline Tentatively on the Market
2024-04-22 - Politics and tariffs may delay ownership transfer of the Trans Mountain Pipeline, which the Canadian government spent CA$34 billion to build.
Energy Transfer Announces Cash Distribution on Series I Units
2024-04-22 - Energy Transfer’s distribution will be payable May 15 to Series I unitholders of record by May 1.