Analysis: US midstream poised for consolidation

The US midstream sector appears ripe for consolidation amid low crude prices, if high-profile deals unveiled in recent weeks by Kinder Morgan are any indication.

"I think that if there is a silver lining in these clouds of low commodity prices, it's going to be the ability to make some extremely good acquisitions over the next six to 12 months," Kinder Morgan chief executive Rich Kinder said on a recent investor call.

True to his word, Kinder Morgan last month said it would buy Bakken pipeline company Hiland Partners from founder and Continental Resources chief executive Harold Hamm for $3bn, including debt. Kinder Morgan this year also bought a 600,000 bl refined products terminal in Philadelphia, Pennsylvania, from Cronus Partners, and announced plans to buy three terminals and one undeveloped site from Royal Vopak for about $158mn.

Crude prices have fallen about 60pc since June, sending stock prices lower and producers scrambling to make capital expenditure cuts and layoffs. Some producers have looked to sell off assets, while refiners and midstream companies say they are looking to buy in an attractive acquisition environment.

Midstream transaction values surged to nearly $80bn in 2014, a three-year high, according to Pricewaterhouse Coopers, which sees the merger and acquisition activity in the sector as poised for growth.

Deals are happening already. Producer Encana late last year sold natural gas gathering and compression assets in the Montney development of northeastern British Columbia for C$412mn. Enlink Midstream this month also signed a deal to acquire hedge fund-backed Coronado Midstream, which owns natural gas and processing facilities in the Permian basin, for $600mn. Last November, Enterprise Products Partners and Oiltanking Partners agreed to merge, combining two major operators of crude storage and pipelines on the Gulf coast.

Storage and pipeline operator SemGroup is under pressure to sell itself from activist shareholder Sandell Asset Management. The group has expressed displeasure with recent declines in SemGroup's share price and called SemGroup grossly undervalued, naming potential acquirers as Magellan Midstream Partners, Plains All American Pipeline, Spectra Energy, Enterprise, Kinder Morgan and Sunoco Logistics.

US independent producer Pioneer Natural Resources has also said it is looking to divest its Eagle Ford midstream business. Under pressure from low crude prices, the company is cutting by half its drilling activity in the Eagle Ford and Permian basin and has cut by 45pc its capital expenditure program to $1.85bn. More exploration and production companies could begin to sell midstream assets, Fitch Ratings said.

"Midstream assets' valuations have held up well even as prices have fallen. Such asset sales could help provide capital needed to cover funding short falls associated with oil at the $50 price level," Fitch analysts said.

There will also be more consolidation among master limited partnerships (MLPs) in the next 12-18 months, said Plains All American Pipeline executive vice president John Rutherford. He pointed out that the MLP universe has gone from about 20 companies to more than 120.

"It will be at a measured pace. People seem to be going through machinations of trying to understand what the impact of the downturn is on their existing assets, their growth projects and their access and cost to capital," Rutherford said.

Rutherford expects to see more exploration and production companies as well as midstream startups sell assets. Plains is considering making purchases.

"We are looking for opportunities to build our business," Plains chief executive Greg Armstrong said. "We like the businesses that we're in and we'd certainly like to be bigger in the businesses that we are in."

Midstream operator NuStar Energy last month bought out its partner in a 4.3mn bl refined products terminal in Linden, New Jersey, paying a subsidiary of NIC Holding $142.5mn.

"We're always looking for other things like Linden. Are there some others out there? Yes, there is probably a few and we're looking around diligently for those," said NuStar chief executive Brad Barron.

Magellan chief executive Mike Mears sounded a more cautious tone. While there may be "some opportunities out there," low prices do not necessarily increase the company's appetite for purchases, Mears said.

"There are projects that I think the risk profile has increased because you are in a lower price commodity environment and the length of that downturn is hard to predict," Mears said.

Refiners Valero, Phillips 66 and Marathon Petroleum have also indicated an interest in purchases.

"Valero is known as a very acquisitive company. Clearly we have our eye out there, and I would think that in a low crude environment, you might see some assets and opportunities created in that environment," said chief operating officer Rich Lashway.

There could be some distressed assets up for sale this year, said Phillips 66 chief executive Greg Garland. The company would be interested in "the right opportunity," he said.

Marathon Petroleum is in a good position to act if the right opportunity comes along, chief executive Gary Heminger said.

"The key here is to be cautious and continue to do very strong due diligence as things become available, because I think a lot will become available," Heminger said.

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