The first few months of 2017 were full of transformational MLP announcements. Large-scale M&A will always steal the headlines. However, the recent spate of small-scale M&A between MLPs shows that the industry is also fine-tuning its asset bases (even in the absence of a large potential deal). Think of it like the middle of a game of Monopoly: most of the properties are already bought, and now the players wheel and deal and trade with each other to try to achieve the strongest positioning.
Source: Plains All American Pipeline (PAA)
As noted in the slide above, given that there is no immediate need for large-scale new energy infrastructure (at least on the supply side), some MLPs have shifted their focus on lowering their costs of capital and changing their structure to prepare for the next large organic growth opportunity. Just because transformational transactions make the most headlines, it doesn’t mean that MLPs are not also considering smaller, incremental opportunities.
Two MLPs Form a JV
PAA and Noble Midstream Partners (NBLX) formed a JV in mid-February to jointly buy a pipeline in the southern Delaware Basin (part of the Permian). Both PAA and NBLX will build connections from their existing systems to this pipeline, and both families of companies will support the pipeline in terms of volumes – parent company Noble Energy (NBL) through an acreage dedication and Plains Marketing with a volume commitment. Instead of a bidding war where one company might have been forced to overpay for an asset it would underutilize, now both companies can pay an affordable amount (total JV was priced at $133 million) for the space they can use. PAA was even able to fund part of their 50% share with PAA units issued to the seller.
MLP to MLP M&A
Valero Energy Partners (VLP) bought an interest in one of PAA’s pipelines and storage facilities in January. At a purchase price of $70 million (paid in cash), this is not a game-changer for the three-billion-dollar company. However, as the closing was accompanied by a 10-year minimum-volume, no-commodity-price-exposure contract with parent Valero Energy Corporation (VLO), it helps to risk-adjust the cash flows.
MLP Asset Trading
Perhaps the best example of Monopoly-style asset trading was when Williams Partners (WPZ) and Western Gas Partners (WES) traded interests. WPZ will now own more of the Marcellus Shale gathering assets, and WES will get WPZ’s interest in gathering assets in the Delaware Basin in Texas. Since, presumably, the Texas assets are worth more (Monopoly: think green properties over red properties), WPZ will also be getting $155 million in cash.
Not a Zero-Sum Game
Let’s be clear: the Monopoly analogy only takes us so far and only explains how MLPs are positioning themselves for the next opportunity. Monopoly is a zero-sum game with a limited number of properties and a limited number of houses/hotels, and it ends with one player owning all assets and cash with everyone else bankrupt. Frankly, the opportunity set in the US is just too large for any one MLP (or any ten MLPs) to be able to handle all of it. Instead of zero-sum, think of it as an approximately infinite sum game. In the short-term, the most visible coming opportunity is in the Permian where increasing production is expected to soon exceed available pipeline capacity. Over the next decades, whether it’s a new technology, a new basin, or renewable liquid hydrogen moving through the pipelines, the energy infrastructure story is far from over.