Summary
- Private equity activity in midstream has served as a catalyst for the space in the past, and a more stable macro environment could lead to additional transactions in 2021 after a relatively quiet 2020.
- Thus far in 2021, there have been some examples of private equity purchasing non-controlling interests in midstream assets.
- Outside of private equity, there has been notable M&A activity in midstream over the last few months.
At various times in recent years, private equity acquisitions in midstream have served as catalysts for the space by highlighting the value of fee-based energy infrastructure assets and providing validation for the midstream business model. Activity understandably slowed in 2020 amid the volatile macro environment. Could a more stable energy landscape lead to more examples of private equity investment in midstream in 2021? With a few transactions announced already this year, it certainly seems possible. Today’s note provides an update on private equity involvement in midstream, as well as additional M&A activity in the space.
Private equity involvement lulled in 2020.
Pre-pandemic, private equity involvement in midstream was fairly regular at both the asset and company level. In particular, there were a number of notable transactions in the second half of 2018 and into 2019 often completed at attractive valuations relative to where public equities were trading (read more). A prime example was the acquisition of MLP Buckeye Partners (former ticker BPL) by IFM Investors in 2019 at a 27.5% premium. Though there was some private equity activity in 2020 (read more), it seemed to slow given the challenging macro backdrop as uncertainty and commodity price volatility likely made deal-making more difficult. Asset owners generally do not want to sell at a perceived bottom, and buyers may be reluctant to purchase assets against a tumultuous macro backdrop.
The headline transaction from 2020 was arguably Berkshire Hathaway’s (BRK.A) approximately $10 billion purchase of Dominion Energy’s (D) natural gas infrastructure and a 25% interest in Cove Point LNG announced in July 2020. The acquisition enhanced Berkshire Hathaway Energy’s existing interstate natural gas pipeline portfolio. With an implied EBITDA multiple of about 10x for the transaction, the valuation was not particularly rich, but the deal still helped highlight the attractiveness of midstream assets and showed confidence in the business model from a renowned investor.
2021 has seen a few private equity transactions in addition to other M&A activity.
Thus far in 2021, there have been some examples of private equity purchasing non-controlling interests in midstream assets. In late February, Kinder Morgan (KMI) and Brookfield Infrastructure Partners (BIP) announced the sale of a 25% minority stake in Natural Gas Pipeline Company of America to ArcLight Capital Partners for $830 million. The implied enterprise value of $5.2 billion represented an 11.2x multiple to 2020 EBITDA. For comparison, as shown in the chart below, the Alerian MLP Infrastructure Index (AMZI) and Alerian Midstream Energy Select Index (AMEI) were trading at 9.0x and 10.0x 2022 EBITDA as of the end of March. To be fair, natural gas pipeline assets tend to garner higher multiples than petroleum pipelines or gathering and processing assets in public markets (read more). To make a more apples-to-apples comparison, the average 2022 EBITDA multiple for the five AMEI constituents classified as Pipeline Transportation ǀ Natural Gas was 10.0x as of March 31 (includes MLPs and US and Canadian C-Corps), and only one name was trading above 11×. The 11.2x transaction multiple provides added context to comparisons of current multiples relative to historical averages.
AMZI is the underlying index for the Alerian MLP ETF (AMLP) and the ETRACS Alerian MLP Infrastructure Index ETN Series B (MLPB). AMEI is the underlying index for the Alerian Energy Infrastructure ETF (ENFR).
In the latest example of private equity investing in midstream assets, Sempra Energy (SRE) announced last week the sale of a 20% interest in Sempra Infrastructure Partners to KKR for $3.37 billion. In December, SRE had indicated that it would pursue a sales process for a minority stake in the newly formed Sempra Infrastructure Partners, which includes Sempra LNG and IEnova – an infrastructure company in Mexico focused on pipelines, storage, and renewables. Given the unique asset base of LNG export facilities and infrastructure in Mexico, the transaction admittedly has less read-through for midstream broadly, but it still represents a hefty energy infrastructure investment by private equity.
On the opposite end of the spectrum, there was also a recent private equity exit. In late March, Crestwood Equity Partners (CEQP) announced a number of transactions resulting in a complete exit by First Reserve after over ten years of ownership. Of First Reserve’s 17.5 million common units, 6 million units were sold in a private placement, and CEQP purchased the other 11.5 million units, as well as the general partner interest, for a combined $268 million. The orderly exit by First Reserve and related strategic updates included a number of positive developments, such as enhanced corporate governance as CEQP transitions to a fully elected board of directors.
To be clear, there has been notable M&A activity in midstream outside of private equity, including sales processes for midstream assets that did not end with a private equity buyer. Enable Midstream (ENBL) was reported to be up for sale in October 2020 and had been under review by co-parent CenterPoint Energy (CNP) going back as far as 2016. In February, Energy Transfer (ET) announced it would acquire ENBL in an all-equity deal valued at $7.2 billion, further expanding its natural gas and natural gas liquid infrastructure footprint on the Gulf Coast and in Oklahoma and Arkansas. Though a different set of circumstances, it also bears noting that Brookfield Infrastructure Partners (BIP) announced plans in February to acquire Canadian energy infrastructure company Inter Pipeline (IPL CN) at a 23% premium to the prior day’s closing price and a 28% premium to the 30-day volume-weighted average price. BIP commenced the offer process on February 22, and it is scheduled to extend until June 7, 2021. IPL’s Board has recommended that shareholders reject the hostile takeover bid and not tender their shares. There have also been inter-family consolidation transactions, such as TC Energy’s (TRP CN) recently completed roll-up of TC Pipelines and Chevron’s (CVX) acquisition of Noble Midstream (NBLX) slated to close this quarter.
Bottom line
A more stable macro environment could pave the way for additional private equity involvement in midstream beyond the examples of recent transactions. Private equity deals can serve as a catalyst for the space, providing important valuation markers and validation for the multi-year outlook for the midstream business model.
