MLP Consolidation Part 1: The Nearly Departed

Summary

The evolving (or shrinking) MLP universe continues to be a common topic of discussion in conversations with investors, even as widely expected transactions are largely behind the space.
Two MLPs are set to be acquired in 2H19 based on announced transactions, while two other MLPs face some uncertainty given the strategic plans of their parents.
With many MLPs having eliminated their incentive distribution rights (IDRs) or already completed a streamlining transaction, we see a much narrower opportunity set for consolidation transactions going forward.

The evolving (or shrinking) MLP universe continues to be a common topic of discussion in conversations with investors, even as widely expected transactions are largely behind the space. News in May of two more MLPs being acquired – one in an anticipated streamlining transaction and one in a comparatively surprising buyout – has revived the consolidation conversation. Additionally, recent uncertainty around the strategic plans of some MLP parents has called into question the future of other MLPs. Consolidation has been the focus, but May also witnessed the first MLP IPO since October 2017, albeit an MLP with slightly different stripes. Given this dynamic backdrop, it is timely to revisit the topic of MLP consolidations and the resulting midstream landscape.

Today’s piece discusses potential MLP consolidation candidates and addresses a popular misconception around MLP conversions. Next week, we will focus on the evolving midstream universe and the implications for investors. For additional context, please see our December note on this topic and our “Bye, Bye, Bye (MLPs)” series from the summer of 2018.

The Nearly Departed – ANDX and BPL.
Two MLPs are set to be acquired in 2H19 based on announced transactions. MPLX (MPLX) expects to close the acquisition of Andeavor Logistics (ANDX) on July 30. The transaction had been anticipated since Marathon Petroleum (MPC) acquired ANDX’s parent in October 2018. The comparatively surprising announcement was Buckeye Partners’ (BPL) buyout by IFM Investors, which is expected to close in 4Q19 subject to customary closing conditions (read more). Following BPL’s announcement, a common question was who could be the next target to be taken private. While the potential for speculation abounds, some names may be more susceptible to a transaction announcement.

Who could be next? Ask the Parents.
Two MLPs face some uncertainty given the strategic plans of their parents. Noble Energy (NBL) filed an 8-K in April announcing a strategic review of its investment in Noble Midstream Partners (NBLX). The filing mentions that NBL may consider a sale of all or a portion of its interest in NBLX, a merger, recapitalization, asset dropdown, simplification, or other transaction from time to time. The 8-K also notes that no transaction may occur at all. In a similar vein, a soon-to-be new parent has clouded the future for Western Midstream (WES). Occidental’s (OXY) acquisition of WES’s parent Anadarko Petroleum (APC) is expected to close in 2H19, and OXY is reportedly looking for a buyer for half of APC’s interest in WES that would also try to purchase the ~45% public interest in WES. Of course, media reports should be taken with some degree of caution. That said, OXY’s management has said that they would consider the monetization of infrastructure assets, which is consistent with their track record having sold various midstream assets last year.

Without an announced transaction, commentary around the future of NBLX and WES will include some degree of speculation, which we will leave to others. Of course, there have been recent examples of a parent monetizing its stake and the midstream company continuing to trade. Earlier this year, Blackstone Infrastructure Partners bought out Tallgrass Energy’s (TGE) general partner. In 2018, Devon Energy (DVN) sold its interest in EnLink Midstream (ENLC) and EnLink Midstream Partners (former ticker ENLK) to Global Infrastructure Partners. For NBLX and WES, a potential transaction could take many forms, or nothing may materialize at all.

Who else remains as potential consolidation candidates?
Other MLPs may be eventual candidates for consolidation given past commentary, though a transaction does not seem imminent. In our December piece, we listed Cheniere Energy Partners (CQP) and TC PipeLines (TCP) as potential consolidation candidates. Based on the commentary below, a transaction does not seem to be on the table in the immediate future for either name.

Setting the story straight: consolidations vs. conversion.
Based on conversations with investors, there seems to be a common perception that many midstream MLPs have chosen to convert to corporations. In reality, midstream MLPs have largely been acquired by parents that were already organized as corporations. Alternatively, the acquiring entity was organized as an MLP and retained the structure. NuStar (NS), Energy Transfer (ET) and WES are examples of surviving entities that remained MLPs. Perhaps it is just a matter of semantics, but if there is a perception that midstream MLPs are flat out converting to C-Corps, then the notion is misguided.

In a few cases, a conversion to a corporate structure or change in taxation occurred in conjunction with the consolidation of a midstream MLP. For example, TGE elected to be taxed as a corporation with the merger of Tallgrass Energy Partners and Tallgrass Energy GP. Antero Midstream Corporation (AM) is the surviving entity of the merger of Antero Midstream GP and Antero Midstream Partners, with Antero Midstream GP having converted to a C-Corp and changed its name in conjunction with the merger. Outside of midstream, Hi-Crush (HCR) was a frac sand MLP that converted to a corporation this year, and Viper Energy Partners (VNOM), a mineral interest MLP, became a taxable entity last year. The read-through from these transactions for midstream names is somewhat limited given different business models and likely different investor bases.

What’s the outlook for MLP consolidations?
Since December 2018, we have been of the view that MLP consolidations were in late innings, and we maintain that consolidations are largely behind the space. We admittedly did not account for the buyout of BPL by private equity or the potential implications of a new parent for WES. Additional private equity buyouts (which could serve as catalysts for the space) or unforeseen changes by parents are certainly possible. However, with many MLPs having eliminated their incentive distribution rights (IDRs) or already completed a streamlining transaction (see appendix), we see a much narrower opportunity set for consolidation transactions going forward. Be sure to check out next week’s piece for a discussion of the midstream landscape and the implications for investors.

Appendix: Select MLP and Midstream Consolidation Transactions

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MLP Consolidation Part 1: The Nearly Departed

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