Attractive Valuations Are Driving MLP M&A Activity
MLPs were trading close to an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 15.0x during the third quarter of 2014. MLP valuations fell significantly at the end of 2015 and at the beginning of 2016. Investors dumped anything related to oil and natural gas with the fall in US energy prices.
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MLPs were trading close to an EV-to-EBITDA multiple of 10.0x, which is quite low compared to the historical average multiple of the Alerian MLP Index (or AMZ). The Alerian MLP ETF (AMLP) tracks the performance of the AMZ.
A few MLPs and midstream c-crops with strong distribution growth, resilient throughput volumes, and low commodity price exposure saw their stocks fall. The falls were due to a general negative sentiment toward the energy sector, which resulted in an attractive valuation for these companies. That drove MLP M&A (merger and acquisition) activity.
However, the slight recovery in commodity prices and the corresponding recovery in drilling activity since February’s lows have driven MLP valuations slightly higher. Currently, MLPs are trading close to 12.6x, which is higher than the AMZ’s average multiple since its inception and higher than its multiple following the financial crisis.