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With midstream MLP prices having recovered about 40% since their February lows but still about 40% from previous highs in August 2014, the industry has hit a sweet spot for M&A pricing. The unit prices of some companies are still low enough and their futures still uncertain enough to make them targets. On the other hand, the unit prices of some companies have recovered enough, and their manage- ment teams have enough faith in the stability of future expecta- tions, to make the companies willing to take the measured risk of being an acquirer.
On a strategic level, U.S. energy is experiencing a paradigm shift. Previously unimagined commodity price levels have removed the asymptotic growth once found in shale plays. Envi- ronmental protests that were formerly limited to the odd coal mine are now focused on pipelines and receiving major media attention. Socially responsible investors, once an elite set that could afford to stagnate fortunes in favor of naive ideals, are outperforming many major indexes. In this new world, with fewer major oil and gas infrastructure projects, large MLPs and energy companies whose investors are accustomed to steady growth are now reaching beyond just rolling up mom & pop businesses or building add-on assets.
The merger between Energy Transfer Equity LP and The Wil- liams Cos. Inc. fell through despite strategic benefits. Technically, the failure was due to the lack of a necessary tax opinion; practically, it was the cash component. In another instance, Enterprise Prod- ucts Partners LP’s bid for Williams never got further than a nonbind- ing proposal due to lack of interest from Enterprise’s own investors and Williams itself.
Both Kinder Morgan Inc. and Plains All American Pipeline LP completed their own internal mergers, removing the old industry joke of an eventual All American Kinderprise Partners.
Canadian companies have been more successful. TransCanada Corp. bought Columbia Pipeline Group Inc. and, as we went to print, Enbridge Inc. announced the acquisition of Spectra Energy Corp. Despite the Canadian/U.S. dollar exchange rate, Canada’s two midstream majors have strong balance sheets.
The simplest mergers are between two standalone entities. The quest for simplicity—and understandability—was one driver of the Kinder Morgan and Plains All American mergers. Mergers between general partners (such as Energy Transfer Equity and Wil- liams) get complicated quickly; however, Enbridge and Spectra are both GPs. Their merger collectively involved eight different pub- licly traded companies—proof that long-term strategic benefits outweigh lawyers’ fees.
Regardless, if the global opportunity set (okay, the North American opportunity set) is limited, combining two companies achieves little more than pushing out the growth stagnation dead- line. It could be enough time for commodity prices to hit their own sweet spot of profitable drilling and low-cost consumption. With 10 years of planned growth, investors can breathe easier.
Maria Halmo is the director of research at Alerian, an independent provider of MLP and energy infrastructure market intelligence. Over $15 billion is directly tied to the Alerian Index Series. For additional commentary and research, visit www.alerian.com/alerian-insights.
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