Revisiting Private Equity Involvement in Midstream
The midstream space saw a number of private equity transactions in 2019 (read more) headlined by the buyout of Buckeye Partners (read more). While the pace has moderated, private equity news flow in midstream has continued into 2020. In January, Magellan Midstream Partners (MMP) announced the sale of three marine terminals to Buckeye Partners for $250 million. In early March, prior to the dramatic sell-off in oil prices, Delta Midstream announced an initial investment from Warburg Pincus and plans to buy, develop, and operate North American midstream assets. More recently, the purchase of Tallgrass Energy by Blackstone Infrastructure Partners closed last month, with Blackstone acquiring all outstanding shares at the price of $22.45 per share announced in December 2019. Last week, Bloomberg reported that Blackstone disclosed a 6.9% stake in Energy Transfer (ET), though the article noted this includes interests owned by Harvest Fund Advisors, which Blackstone purchased in 2017. In short, 2020 has seen continued developments on the private equity front, but things have slowed down relative to 2H18 and 1H19 when there were multiple transactions at attractive valuations spanning geographies and asset types.
Given the change in commodity prices and revised near-term outlook for energy production, what is the potential for private equity involvement in midstream today? It’s not an easy answer. Midstream equity values are depressed, which could make transactions more likely, but companies may be reluctant to agree to deals at a low point unless there is an element of distress. Additionally, only so many midstream companies may be buyout candidates given significant parent or insider ownership for many names. While the current macro environment is challenging, private equity tends to be more long-term focused with multi-year holding periods and may be better able to look past near-term headwinds. That said, the weakness in commodity prices can make it more difficult to agree to a price for any energy-related assets, though this is particularly true for upstream oil and gas producing assets. The challenges facing upstream valuations could bring more interest to midstream deals, but admittedly, valuing midstream assets is not necessarily easy in this environment either. Additional M&A activity at the asset level is possible, particularly if midstream companies pursue asset sales to raise cash for other purposes. Plains All American (PAA) is aiming for $600 million in non-core asset sales this year, with $440 million closed or awaiting close under definitive agreements. PAA management indicated on their call this week that sales could be more difficult to achieve in the current environment, leading to some potential slippage into 2021.
The current backdrop can make it difficult for buyers and sellers to agree to a price for assets, potentially limiting private equity transactions in midstream aside from select asset sales. Private equity may be bargain hunting in today’s environment, but companies may be reluctant to sell at the perceived bottom. Given the dynamic market environment, private equity involvement, or lack thereof, will continue to bear watching.