Keith Fullenweider calls it the year of the Master Limited Partnership.
Demand for pipelines and energy transportation infrastructure has driven midstream MLPs — tax-advantaged corporate structures that typically pay out large cash distributions to investors — to an enthusiastic stock market, giving them the financial muscle to make a large chunk of the year’s biggest energy acquisitions.
Eight of the 10 largest energy deals this year involved midstream MLPs as the industry shifts its pipeline network to newly active U.S. shale plays, and unless those companies’ valuations tank, they will remain the most competitive buyers on the market next year, said Fullenweider, a lawyer with Vinson & Elkins who advises clients on energy merger and acquisitions.
Fullenweider spoke with FuelFix about MLPs’ advantages, the reasons some deals collapse and what he expects the landscape to look like in 2014. Edited excerpts:
FuelFix: We’ve seen a pairing of private equity-backed buyers and “orphan assets” that larger producers are selling. What’s driving that?
Fullenweider: Private equity investors are attracted to the U.S. oil and gas space because they see a need for capital as a result of the shale boom. The transactions have tended to be among upstream companies divesting non-core assets so they can put more capital in their promising shale plays. That’s been building over the last five years. The largest was Apache’s sale of its Gulf assets to a private equity-backed company. Almost all of the rest of the deals involved MLPs and midstream assets. Most of the largest midstream companies are going through a great deal of consolidation.
FuelFix: What do you expect the landscape to look like next year?
Fullenweider: I think that will be driven by valuations for the MLPs. If they stay strong, they will continue to be the most competitive. I think the primary theme of the financing of the shale boom will carry on. If MLP valuations fall off for some reason, you’ll see more private equity and foreign investors.
FuelFix: Have foreign investors taken a back seat this year?
Fullenweider: There are definitely fewer foreign names when you look at the deals completed this year. Foreign-investor deals peaked about two years ago, when there were a lot of foreign companies that wanted to have exposure to U.S. shale. Many are currently investing in the assets they acquired.
FuelFix: We’ve seen a lack of companies buying other companies in recent years: Do you expect that to change?
Fullenweider: I think you’ll see company-to-company deals where smaller resources or bolt-on acquisitions are involved. Those larger companies are always going to evaluate a deal against their own projects.
FuelFix: What’s the biggest challenge to get a deal done?
Fullenweider: When transactions don’t get done it’s usually because of the different expectations on valuations. Natural gas deals are the most difficult to value right now. Oil prices have been strong, and oil-asset deals have been easier to value than natural gas assets. There’s a variance of opinions on where natural gas prices will be in the future.
FuelFix: What about for midstream companies?
Fullenweider: On the midstream side, among the most significant issues that impact valuation are expectations on the cost of construction: Some of these projects are large and capital-intensive, and that can lead to a wide variance of opinions on the geology and how prolific a shale play will be. There’s an intense focus on costs, and those estimates can have a tremendous impact on the value of the resource.