Merger and acquisition (M&A) activity in the midstream sector last year got back to the all-time high level of 2006, driven mainly by growing natural gas production and the weak gas price environment, according to the "IHS Herold 2011 Global Midstream M&A Review."
Global M&A in the sector -- which includes natural gas pipelines, gathering and processing facilities, as well as tankers and diversified holdings -- hit $49 billion last year, representing a 400% increase over 2009's $12.6 billion in total asset deal value, IHS said. Nearly all (94%) of the activity last year was driven by spending on gas pipelines and gas gathering and processing facilities in the United States.
Several large transactions involving restructurings of master limited partnerships (MLP) operating mainly in conventional U.S. gas plays contributed more than two-thirds of transaction value, but transaction value for shale gas play assets was up 255% year over year, reaching an all-time high of more than $5 billion, according to IHS. Transactions involving gas gathering and processing facilities led the deal count with 24 deals in 2010, followed by 10 deals involving liquids pipelines and eight deals involving gas pipelines.
"The midstream M&A activity in 2010 was clearly a reflection of the rapidly increasing volumes of natural gas that are being produced and brought online in the U.S. combined with the current unfavorable economic climate for gas," said Cynthia Pross, senior analyst for M&A research at IHS. "I think many of these deals indicate a desire by companies to cut costs by streamlining operations through restructuring, to improve balance sheets, and to gain increased access to capital through larger, consolidated operations. Ultimately, they want to optimize their profitability, since natural gas margins are so thin."
Pross noted that there were several U.S. midstream restructurings in 2010 involving MLPs. "We have seen MLPs streamlining operations through acquisition of their general partners, eliminating general partner distribution requirements and using those funds for capital expenditures or to maintain distributions to MLP unitholders."
One example of the streamlining strategy was evident in the largest midstream transaction in 2010, when Enterprise Products Partners LP, the gas gathering and processing MLP, acquired its general partner, Enterprise GP Holdings LP, giving the MLP control of the $22 billion enterprise value MLP (see Daily GPI, Sept. 8, 2010). Enterprise Products Partners has gas gathering and storage assets in Texas, Louisiana, Colorado and Ohio, primarily serving conventional gas plays.
Another major restructuring and the largest gas pipeline transaction value for 2010 was Williams Companies' sale of its U.S. interstate gas pipeline and midstream business and limited partner interests in Williams Pipeline Partners LP, to Williams Pipeline Partners LP for $11.8 billion total transaction value (see Daily GPI, Jan. 20, 2010), IHS found. This new structure frees up additional funds to direct to Williams Companies' upstream exploration and production operations, and it consolidates and streamlines midstream operations, cutting operating costs, Pross said. Williams Pipeline Partners LP has midstream operations, with major pipelines, primarily in the U.S. Rocky Mountains, that serve conventional gas plays, as well as some assets that serve unconventional gas plays in the Marcellus Shale.
"Aside from cost control through consolidation and a need to enhance balance sheets," Pross said, "many of these companies find the M&A market a way to quickly and economically expand geographically, versus taking on extensive new construction. In particular, we have seen this in U.S. shale plays, where we witnessed a higher deal count than those for conventional gas plays in 2010. Most of these transactions were asset-level deals that ranged from approximately $100 million to $1 billion in total transaction values."
In addition to consolidation among pipeline companies, 2010 saw integrated oil and gas companies selling midstream assets to midstream companies, allowing the seller to focus financial resources on upstream operations while locking in long-term midstream capacity agreements with the buyer as part of the deal.
"As infrastructure continues to develop in the shale plays, we would expect to see more consolidation among players, resulting in fewer companies, but those that remain will be larger, stronger companies with bigger footprints in the shale plays," Pross said.
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