M&A activity for MLPs
MLPs should grow their distributable cash flows to maintain a suitable coverage ratio and raise their distributions. Long-term distributable cash growth comes by pursuing organic projects or accretive M&A (merger and acquisition) opportunities.
For the 2013–2016 period, M&A activity for MLPs was the highest in 2014. The fall in M&A activity in 2015 and 2016 could be attributed to uncertainty in the MLP sector, as commodity prices saw their historic lows during that period. MLPs had a good start to 2017 in terms of M&A activity. The sector saw deals amounting to $27.6 billion in the first two months of 2017, although M&A activity slowed down in March.
Most of the recent deals in the MLP sector have been strategic acquisitions and simplification transactions. They exclude the merger announcement between Energy Transfer Partners (ETP) and Sunoco Logistics Partners (SXL) in November 2016. However, if we look at the Energy Transfer Equity (ETE) group, the ETP-SXL merger is also a simplification transaction. Oneok (OKE) and Oneok Partners (OKS) announced a major simplification transaction in 1Q17. For details, please read That’s a Wrap! ONEOK Will Acquire ONEOK Partners.
In strategic acquisitions, companies are looking to increase their exposures in the prolific shale plays, including the Permian and Marcellus regions. The most recent example is the asset swap transaction between Williams Partners (WPZ) and Western Gas Partners (WES). The advantage of strategic acquisitions over organic expansions is that they’re immediately accretive, acquired assets are generally complimentary to existing assets, and the assets are mostly tied to long-term customer contracts.
Could M&A activity pick for MLPs after 1Q17?
Overall, M&A activity for MLPs might continue to stay weak in the coming months, considering the current volatility in crude oil and natural gas prices. However, the sector might continue to experience strategic acquisitions, as we saw above. MLPs might avoid big consolidations, given the current uncertainties, high leverage, and higher valuations compared to the 2015–2016 period.