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MLP Consolidation and Conversion Update: Structure Questions Likely to Subside for Now

03/25/20 | Stacey Morris

Summary //

  • Since our last discussion of MLP consolidations in July 2019, there have been multiple developments, with acquisitions currently pending for some names, while other MLPs that had seemed at risk of structure changes maintained the status quo.
  • The results of MPC’s strategic review of MPLX fit with the trend to this point of midstream MLPs largely maintaining the structure and not pursuing outright conversions.
  • Contemplated changes to MLPs’ structures likely remain on hold until at least after the election.

At one time, the hope had been that investor focus would shift to midstream fundamentals instead of questions around structure. It’s a good reminder to be careful what you wish for. Conversations around MLP consolidations or C-Corp conversions have been replaced by a focus on fundamentals, but instead of the positive tailwinds in midstream, the questions surround how midstream companies will be impacted by today’s lower oil price environment (see our recent research for related commentary). Amid the market volatility, investors may have missed a few recent structure and consolidation updates, which we highlight in today’s piece in addition to providing commentary on the outlook for MLP to C-Corp conversions.

What’s new?
Since our last discussion of MLP consolidations in July 2019 (Part 1 and Part 2), there have been multiple developments, with acquisitions currently pending for some names, while other MLPs that had seemed at risk of structure changes maintained business as usual. In late February, Equitrans Midstream (ETRN) announced that it was acquiring MLP EQM Midstream (EQM) in a stock-for-unit transaction as part of a broader strategic announcement. Based on recent history, a midstream C-Corp parent acquiring a majority-owned midstream MLP comes as little surprise, though the transaction may have happened sooner than expected given it had not been a topic of conversation on recent earnings calls. Additionally, as announced in December, Tallgrass Energy (TGE) agreed to be acquired by Blackstone Infrastructure Partners, with the transaction expected to close in 2Q20. Blackstone indicated earlier this month that it plans to comply with its obligations outlined in the merger documents. While not a consolidation, Hess Midstream (HESM) completed its conversion to an Up-C structure in December.

Last week, Marathon Petroleum (MPC) completed its strategic review of MPLX (MPLX), announcing that MPLX would maintain its current structure with MPC as its general partner. In making the announcement, MPC provided several reasons to keep the status quo, including the large, stable cash flows provided to MPC by MPLX and the potential tax and debt restructuring costs required in a separation. For background, in late September 2019, activist investor Elliott Management, a top ten holder of MPC, sent a letter to MPC’s board recommending that the company be split into three independent entities to improve shareholder value. Elliott recommended the separation of MPLX as an independent midstream company. Elliott and MPC have a somewhat lengthy history of engagement on strategic issues.

Two MLPs that had faced some uncertainty last year due to the potential plans of their parents are also seemingly maintaining their structure while implementing other changes. Noble Energy’s (NBL) strategic review of Noble Midstream Partners (NBLX) concluded with an IDR elimination and dropdown of NBL’s remaining midstream assets as announced in November 2019. Western Midstream (WES), which had faced some uncertainty following Occidental’s (OXY) acquisition of former parent Anadarko, announced several agreements in January 2020 that would pave the way for WES to operate as a stand-alone, independent company.

In our first series on MLP consolidations back in July 2018, TC PipeLines (TCP) and Cheniere Energy Partners (CQP) were highlighted in a list of potential consolidation candidates based on management commentary at the time and are the only two names from that list to not have undergone a transaction. Similar to EQM, CQP and TCP both have midstream C-Corp parents. However, there has not been much in the way of recent commentary around consolidating. Why do parents matter? In general, a consolidation transaction seems less likely if an MLP’s parent is a refiner, exploration and production company (E&P), or integrated major, which tend to trade at lower multiples than their related midstream entities.

What about MLPs converting to C-Corps?
For larger MLPs, a recurring question around structure and the potential of converting to a C-Corp persists. As discussed in the past, a common misconception is that MLPs are converting to corporations, but primarily, corporations have been consolidating MLPs, or conversion has coincided with other simplifications like IDR eliminations or mergers (read more). MPLX’s announcement fits with the trend to this point of midstream MLPs largely maintaining the structure and not pursuing outright conversions.

Prior to the oil and broader market sell-off, MLPs continued to evaluate structure questions, likely considering future corporate tax rates and what may happen in the 2020 election, tax implications of a transaction for unitholders, and whether the benefits of a C-Corp structure offset those potential issues.  While company commentary varies, the quote in the box below from Chairman, President and CEO Michael Mears of Magellan Midstream Partners (MMP) provides a good example of the issues MLPs are weighing. On its 4Q19 earnings call, Energy Transfer’s (ET) Chairman and CEO Kelcy Warren indicated that the company would probably offer a C-Corp alternative to its unitholders this year. Meanwhile, the management of NGL Energy Partners (NGL) took a firm stance that NGL would not convert to a C-Corp.

What’s the outlook for structure changes?
With all that’s going on today, structure questions have likely taken a back seat to running the business and making sure companies are well positioned for these challenging markets. Even before the energy rout, we saw little incentive for companies to change their structure ahead of the election later this year. Additionally, some investor concerns around issues like leverage or corporate governance can be addressed within the MLP structure. For example, common unitholders of MMP and NuStar Energy (NS) are able to vote for members of the board (read more in our ESG white paper). With the oil and broader market sell-off, valuations in the space are depressed, which can be conducive for consolidation transactions. However, buyers and sellers will likely want to see the dust settle a bit before pursuing any deals. In our view, contemplated changes to MLPs’ structures likely remain on hold until at least after the election.