High-Yield Buyout Prospects As the Energy Sector Finds A Bottom

Dividend Investing, Energy Investing, Master Limited Partnerships (MLPs)

It is starting to look like the long suffering energy midstream sector has found a bottom. This is good news for income investors, since this group of stocks pays growing dividends with very attractive yields.

A market bottom for the sector will give positive, double digit annual total returns going forward. The current level of low valuations on midstream companies has put them in the crosshairs as buyout candidates. While the investing public doesn’t like these stocks, private equity funds are very interested in acquiring energy midstream assets.

Energy midstream consists of the assets that get crude oil, natural gas and natural gas liquids from the production areas to the end users. The energy midstream companies own pipelines, storage facilities, terminals and other assets to keep energy moving through the overall energy sector. Until a half-decade ago, most of these companies were organized as master limited partnerships (MLPs).

The energy crash resulted in an industry wide change of about the multiple entity structures that led to sponsor corporations running publicly traded MLPs. The Alerian website lists 33 MLPs that have been acquired over the last several years. The Alerian MLP Index now has that same number of constituents. The MLP space has been roughly cut in half. A number of former MLPs have merged into similar companies that operate as corporations, so the entire sector has not shrunk by half, but it has shrunk.

The previous round of mergers was driven by sponsor corporations buying in the MLPs they already controlled. The next round will be outside money investing in to buy energy infrastructure assets. Midstream stocks remain, to use the technical term, stupidly cheap. I have been told by several well-informed sources that private equity money is very interest in acquiring midstream infrastructure assets and actively pursuing acquisitions.

The first shot in the next round of acquisitions was fired in May 2019 when Buckeye Partners LP (BPL) agreed to be acquired by the IFM Global Infrastructure Fund. The all-cash $6.5 billion offer was a 32% premium to BPL’s average trading price for the previous six months. The buyout amount including BPL’s debt was at 10 times the annual EBITDA run rate. I believe this is just the first of up to a half-dozen buyout offers we will see in the midstream energy space through the remainder of 2013.

Here are three companies that are buyout candidates:

Tallgrass Energy LP (TGE) owns interstate natural gas and crude oil pipelines. The jewel asset is the Rockies Express Pipeline, which is a bi-directional natural gas pipe running from Wyoming to eastern Ohio. The 760 mile Pony Express pipeline transports crude from Wyoming to Cushing, OK.

Tallgrass also owns several other shorter gas and oil pipeline networks along with crude oil gathering services.

The TGE share price has not held up even as financial results continue to improve.

In March Blackstone Infrastructure Partners acquired the Tallgrass General Partner interests and 44% economic interest in TGE. The investing world seems to be waiting for Blackstone to make a move to buy up the rest of the company.

TGE shares currently yield 13%.

TC Pipelines LP (TCP) has been mentioned as a likely buyout candidate. The company has ownership interest in eight FERC regulated natural gas pipelines.

In May 2018, TCP slashed its distribution to LP investors by 35%. The share price has climbed in the year since the dividend cut. Not something you usually see. I think in this case the price gains are due to investor belief that the company is in play as an acquisition candidate.

The shares currently yield 7%.

Western Midstream Partners LP (WES) was an MLP controlled by and providing midstream services to Anadarko Petroleum.

This month Occidental Petroleum (OXY) completed its purchase of Anadarko. OXY took on a lot of debt to fund the acquisition and one way to raise capital would be to sell its stake in WES to a third party.

If private equity goes after the company, it makes sense to buy up the whole company including the publicly traded shares.

WES currently yields 10.5%.

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