There are still worlds to conquer for master limited partnerships (MLP), but access to capital is more difficult to obtain now than it was just months ago, making consolidation among players a more likely scenario in the months ahead, according to a report by Sanders Morris Harris (SMH).
Even if the technical imbalance either stabilizes or reverses, MLPs still will be looking for a major project or acquisition to "move the needle," said SMH analyst Robert Lane. In a report on MLPs now operating, Lane predicted that instead of new offerings there may be a "number of consolidations among players, with larger MLPs being the likely acquirers and nonsponsored MLPs, especially those well into the high splits, being the likely targets."
Organically, "large, accretive projects are one of the few ways that MLPs will be able to move the needle in the coming years," Lane said. "In the meantime, we expect to continue to see a number of incremental projects that, on aggregate, can provide most MLPs with enough new vitality to carry themselves forward on the march of steady distribution increases. But to really get investors excited, it may take something more substantial."
The past few years saw some consolidation within the MLP market, for instance, the wedding of GulfTerra Energy Partners to Enterprise Products Partners in 2004 (see NGI, Aug. 4, 2004). This year, Lane noted that there has been more consolidation within the general partner area, notably Enterprise GP Holdings' consolidation of the general partner of TEPPCO and Enterprise's substantial investment in Energy Transfer Partners earlier this year (see NGI, May 14).
So what about 2008?
Most of what SMH anticipates for large-scale projects over the coming year is derivative, said Lane: "expansions and extensions of assets that are exploiting already existing developments on the upstream and downstream sides." More refinery terminals and storage projects are expected, and on the natural gas side, "new gathering and pipeline capacity to connect developing shale plays to nearby natural gas pipelines and capacity increases to take it away." Additionally, SMH expects to see more processing projects to serve developing supply markets, as well as new storage and header capacity to serve the growing liquefied natural gas market.
"However, we do not expect to see the next REX [Rockies Express Pipeline] or Independence Hub and Trail [in the deepwater Gulf of Mexico] in the near future, in large part because there are plenty of incremental organic opportunities to be found in existing mega-projects," said Lane. "As a result, while finding ways to grow distributable cash flow may not be a problem, we believe it will be harder for MLPs to generate the excitement they hope for with an announcement of a planned organic opportunity."
Even if SMH were to call 2006 the "Year of the General Partner" and 2007 the "Year of the IPO [initial public offering] Flood, we are not by any means ready to christen 2008 the Year of the Consolidation," said Lane. "However, we do believe that the ability to make a splash with huge new organic projects will become a bigger challenge as the partnerships become more numerous (and therefore, competitive) and the biggest partnerships become even bigger. We therefore predict more than one MLP consolidation announcement will hit the newswires over the next 12 to 18 months."
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