Aging infrastructure, growing demand for gas and other commodities and liquefied natural gas (LNG) terminal development all mean that changes are under way in the midstream energy sector, according to Standard & Poor's Ratings Services.
The midstream is transitioning from "a low-spending, maintenance-oriented model to one of much bigger spending on multi year, growth-oriented projects and a greater willingness to pursue acquisitions," wrote two S&P analysts in a research note last week. Look for consolidation of existing companies and strategic asset purchases to continue. S&P noted the agreement by Plains All American Pipeline LP's to acquire the general partner of Pacific Energy Partners LP.
The ratings agency said multiples for acquisitions are increasing beyond the previously common 9x to 10x. The Plains deal represents a multiple of 13x earnings before interest, taxes, depreciation and amortization (EBITDA). Currently, EBITDA is at the top of the cycle for companies with commodity price exposure, noted S&P. On a mid-cycle basis multiples are even greater. "A permanent shift to higher EBITDA multiples for industry transactions could dampen credit quality if the acquirer is burdened by the ultimate price and does not realize cash flow targets in the expected time frame," the S&P analysts said.
Still, there are plenty of organic growth opportunities in the midstream. "Aging infrastructure, growing demand, and increased needs for LNG projects are providing the impetus for continued capital expenditures," the analysts wrote. "Many of these transactions are additions and expansions to existing properties. Projected cash flow multiples for these internal projects are half those of recent mergers and acquisitions, which enhance economics. Still, the growing size and scope of organic projects has strained some balance sheets, particularly for the master limited partnerships, given the mismatch of the timing of spending and cash flow and the pressure this places on distribution coverage."
Among companies highlighted, S&P noted an open season on Atlas Pipeline Partners LP's Ozark pipeline that could lead to a 100-mile expansion at a capital cost of about $150 million (see NGI, March 6). S&P also noted the recent purchase of Tulsa, OK-based ScissorTail Energy by Copano Energy LLC. This doubled Copano's asset base but likely will test management's integration capabilities, S&P said.
Boardwalk Pipeline Partners LP was singled out for two large expansion projects, expected to cost about $800 million and add $100 million in incremental EBITDA (see NGI, June 12; March 6). S&P said that Enterprise Products Partners LP faces "cash flow volatility due to its sizable natural gas processing and fractionation operations." In May the company said it was beginning a $40 million expansion of its gas liquids import/export capability at its Houston Ship Channel facility, its gas liquids pipeline capacity from the Ship Channel to its fractionation and storage complex at Mont Belvieu and fraction capacity at Mont Belvieu.
Inergy LP is growing through expansion of its Stagecoach gas storage facility (see NGI, April 10) as well as acquisition of retail propane distributors. Oneok Partners LP, formerly known as Northern Border Partners (see NGI, May 22), is expected by S&P to become ONEOK Inc.'s primary growth vehicle.
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