May 2024, Vol. 251, No. 5

Editor's Notebook

Editor’s Notebook: M&A Appears Here to Stay

By Michael Reed, Editor-in-Chief

(P&GJ) — It appears likely that the wave of midstream merger-and-acquisition activity of the past few years hasn’t reached its peak yet. In fact, to hear some insiders tell it, a full-on tsunami may not be far away.

Midstream consolidation obviously makes sense for a lot of reasons right now. Among them is this: it serves as an effective way of addressing the dearth of midstream companies that are large enough to offer diverse services, such as processing, storage and exportation options, across sprawling areas. 

M&A can also provide some substantial flexibility and cost-savings, allowing for  shared methane reduction costs, thereby increasing shareholder returns.  

Scale “is definitely important,” Williams Companies Chief Operating Officer Michael Dunn told Reuters during the recent CERAWeek conference in Houston. “Continuing to expand is certainly one of our goals.” 

Additionally, with permitting, regulatory and legal hurdles having increased substantially in recent years, it just makes buying another company’s midstream assets more economically feasible than trying to build new pipelines in a timely manner.  

Overall, M&A options have the ability to leave midstream companies operating from a position of strength by providing debt-cutting options and allowing a switch to fee-based business models, which are less tied to commodity price swings.  

In all, there were about $23 billion midstream mergers and acquisitions during last calendar year, according to P&GJ estimates, but through the first quarter of 2024 there are in excess of $13 billion in deals on the table. 

Among the most recent of note are EQT’s plan to acquire its one-time spinoff Equitrans Midstream in a $5.5 billion deal and Sunoco’s decision to integrate pipeline operator and fuel storage company NuStar Energy through a $7.3 billion agreement. 

In 2023, some of the bigger deals included Energy Transfer’s $7.1 billion deal for Crestwood, along with its $1.5 billion Lotus Midstream agreement, and Phillips 66’s purchase of pipeline operator DCP Midstream for $3.8 billion. 

There was also a perfect illustration of another type of driver at play in the upswing in M&A activity. It occurred only months ago when the unit-holders of Magellan Midstream Partners, a crude oil and refined products-focused company, voted overwhelmingly to approve its sale to the natural gas and NGLs-focused company, Oneok, Inc.  

The Tulsa-based company now owns  25,000 miles-plus of liquids pipelines, with much of that concentrated within the Gulf Coast and Mid-Continent hubs. 

“When you look at just the fundamentals of NGLs and natural gas, the growth in demand for those is very high,” Aaron Milford, chief executive of Magellan Midstream told the Financial Times in an interview not long after the sale was completed. “There’s just more growth in those particular commodities.” 

He described crude oil and refined products as remaining “very stable, we think, for a very long time,” but which already have the bulk of their necessary energy infrastructure already in place. 

I suppose a reasonable analogy could be drawn between long-haul crude oil pipelines in the United States and the country’s interstate highway system, which began construction in 1956 and was proclaimed completed when Interstate 70 opened through Glenwood Canyon in Colorado.  

The bulk of the work now involves maintenance, repair and shorter distance realigning of routes. And that’s not likely to change any time soon, according to analysts of mergers and acquisitions. 

Recently, in what could potentially be an even huger M&A deal than those mentioned earlier, Occidental Petroleum began testing the waters for the potential sale of its Western Midstream Partners assets, which has a market value of more than $18 billion. 

The move would help the Warren Buffett’s Berkshire Hathaway-backed company slash the $18.5 billion in debt it took on due to acquisitions. Occidental owns 49% of the master limited partnership as well as its general partner, making Occidental the controlling entity. 

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