Pipeline operators have been roaring into public markets in search of badly needed capital, diving into an untapped money pool as the country grapples with a lack of energy transportation infrastructure.
Yield-starved investors, bouncing from low interest rates on bonds to a choppy stock market, have appeared happy to fork over the millions that midstream companies — most of them tax-advantaged master limited partnerships — have asked for in the past year.
And based on the market’s momentum, the industry could see five to 10 more similar public offerings announced before the year is out, said Joe Dunleavy, a partner at PricewaterhouseCoopers in Houston.
“It’s a very active and frothy market, and there’s a lot of chatter; I’ve had several phone calls on it — today,” Dunleavy said. “There’s a great need for infrastructure development. A lot of the pipelines were built for World War II, and there’s a need for repair.”
This year, public markets have bet $3.6 billion that pipeline companies will be able to capitalize on the lack of infrastructure linking newly productive shale plays and thirsty U.S. markets.
And while it’s hard to know who will strike it rich at the wellhead, midstream companies have a distinct advantage for attracting investment dollars: Their revenue comes from transportation fees, so they make money no matter who produces the most oil and gas, or for what price it sells.
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Ten of the 11 energy public offerings announced this year were master limited partnerships in the midstream sector, compared with 12 MLPs in midstream for all of 2012, according to PricewaterhouseCoopers.
Though MLPs began hitting the market in the 1980s, the last three years have seen a major growth spurt: forty-five of the 106 MLPs now existing started up between 2010 and this month, according to PricewaterhouseCoopers.
Pipeline, storage and processing companies would need to spend $6 billion to $10 billion a year for the next two decades to meet the country’s need for infrastructure, according to a 2009 study by the trade group Interstate Natural Gas Association of America Foundation. Natural gas pipelines would soak up about 80 percent of that investment, the group estimated.
“We’re in a wave of adding significantly to the midstream asset base,” said Cliff Atherton, an investment banker at GulfStar Group in Houston. Those assets — mostly pipelines — have a much longer lifespan, and thus, a stronger cash flow, than oil and gas wells, which deplete over time, he said.
Most of those midstream companies are spinning into the equities market as master limited partnerships, corporate structures that distribute much more of their cash flow to investors than other companies.
Raised $378 million
Phillips 66 Partners, for example, made its debut on the New York stock exchange July 23, raising $378 million with an initial offer of 16.4 common units — similar to shares in a corporation. The master limited partnership, a subsidiary of Houston-based refining and midstream company Phillips 66, has pipeline and storage assets in Texas, Illinois and Louisiana.
In San Antonio, Valero Energy Corp. filed for a $345 million offering last week to spin out an MLP for its logistics assets, which garnered $46.4 million in revenue in the first half of the year. And in Oklahoma City, Devon Energy Corp. is making plans to spin out an MLP for its pipelines and processing plants business.
“What’s exciting about midstream MLPs right now is they have value plus growth: They’re increasing infrastructure, growing assets and cash flows,” said Tanjila Shafi, an equity analyst at Standard & Poor’s. “Investors have an appetite for yield, and these MLPs provide that.”
For the pipeline operators, going public makes sense for a lot of reasons: Access to low-cost capital gives midstream companies an edge in buying up more assets at a time when private buyers and sellers see a big difference in assets’ value, said Greg Matlock, a partner at Ernst & Young in Houston.
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Matlock said he has discussions with midstream companies every week about the possibility of going public or buying and selling assets. The key selling point for investors is how badly the entire industry — from producers to processors — needs infrastructure.
“Midstream, clearly, has the most easily predictable stream of cash,” Matlock said. “It’s the one place investors can lock in the numbers.”
Still, not all the MLP action has gone to the midstream sector. Within the last year, the market has seen oil field services, drilling, and other energy-related companies dive into the tax-advantaged corporate structure, even though they may not enjoy the reliable cash flow that makes midstream MLPs attractive.
“There’s a big investor base for it,” said Jonathan Hough, a director at BMO Capital Markets in Houston.
While public markets have opened up to the sector, it’s actually private players that are stirring up all the buzz.
Private equity investors have pushed their investments in the energy industry up from $13 billion in 2010 to $31 billion last year, according to PricewaterhouseCoopers.
Yet several of this year’s energy-related public offerings have emerged from private equity firms making an exit.
Keeping the focus
A risk in going public, PricewaterhouseCoopers’ Dunleavy said, is losing focus on day-to-day operations because of the need to meet stricter Securities and Exchange Commission regulations as a publicly traded company.
“You don’t want to ring the bell at the New York Stock Exchange and then fail to make your SEC reporting requirements,” Dunleavy said.
But the challenges aren’t stopping the midstream sector’s move toward master limited partnerships and initial public offerings.
“I see that growth, of IPOs and MLPs, continuing into next year,” Dunleavy said.
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