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29-08-2014, 08:31 PM
Oil and gas glut sparks merger boom
PUBLISHED: 7 HOURS 10 MINUTES AGO | UPDATE: 7 HOURS 9 MINUTES AGO
Oil and gas glut sparks merger boom
Many of the businesses involved in deals are energy infrastructure businesses, which tend to be set up as master limited partnerships, or MLPs. Photo: Bloomberg
conRAD DE AENLLE
The merger boom in the energy sector shows no signs of slowing.
As energy production in the US rises substantially, pipeline and storage companies will look to expand capacity through acquisitions, industry analysts and investors forecast.
“Companies are lining up to take advantage of this production-growth story,” said Quinn Kiley, a manager of energy infrastructure investment portfolios for Advisory Research Inc. “Companies have huge opportunity sets in front of them.”
Figures from the federal Energy Information Administration highlight the extent of the growth. US energy production has reversed decades of stagnant or falling output in recent years. Oil production has gained 49 per cent and natural gas output has increased 28.5 per cent, from their lows in the mid-2000s through to last year. Reserves that are economically viable to recover are up sharply, too, the agency’s website says, providing energy companies a greater incentive to invest.
“As technology gets better, it makes production from some formations profitable and predictable and productive over a long period of time,” Mr Kiley said. “That leads to a changing dynamic for companies that transport and store this supply.”
Merger activity has been strong this year in the energy sector in the US, says data from Thomson Reuters. About $US123 billion ($131.44 billion) in energy mergers were announced from January through to last month, up 47 per cent from the period a year earlier, the data showed.
Many of the businesses involved in deals are energy infrastructure businesses, which tend to be set up as master limited partnerships, or MLPs. These are tax-favoured vehicles that in the early part of their lives are encouraged to expand as rapidly as possible for complicated reasons related to how they distribute income from their operations.
Deborah Byers, managing partner at Ernst & Young in Houston, said: “You can’t be an MLP without being a bit of a deal junkie. You have to grow your base constantly to pay the distribution.”
‘KINDER MORGAN NEEDS CHUNKY ACQUISITIONS’
MLPs are likely to keep merging, even though a pioneer of the structure, Kinder Morgan, is abandoning it. Other potential buyers were expansion-minded pipeline companies, said Todd Williams, an energy analyst at Westwood Management. Even Kinder Morgan – the industry leader, with 80,000 miles (129,000 kilometres) of pipelines – had “holes in its asset footprint,” he noted, particularly in the Marcellus shale formation in the Northeast and the Bakken deposits in Montana, North Dakota and adjoining parts of Canada.
Possible takeover targets that were pipeline operators for Kinder Morgan included Oneok Partners in the Bakken field and MarkWest Energy Partners and Williams Inc in the Marcellus, he said. They are the right size in the right places, in his view.
“Kinder Morgan needs chunky acquisitions” worth above $US5 billion each to have a meaningful effect on growth, Mr Williams said. The entities he mentioned had market values of $US13.5 billion to $US44.2 billion as of Wednesday.
Mr Kiley agreed that Kinder Morgan could pursue MarkWest. But he sees Williams, which has extensive assets throughout the country, as so big that a bid would run afoul of regulators.
A business that Mr Kiley finds ripe for a Kinder Morgan-style consolidation is Energy Transfer Equity, an MLP that controls four others involved in various activities. It recently announced plans to buy Susser Petroleum Partners, which operated gasoline stations, he noted.
It also might create a conventional corporation to hold some of its own equity and then have an initial public offering, he said, to attract investors for whom an MLP’s tax breaks are wasted, such as holders of tax-free retirement accounts.
Ms Byers of Ernst & Young considers the outlook for deals so extensive that certain companies could be either buyers or targets, including Anadarko Petroleum and Marathon Petroleum. Large foreign energy conglomerates, like Cnooc in China and Total in France, were also possible bidders, she said, adding that if foreign buyers were enticed into the market, they would have plenty of company.
“Everybody, whether big integrated players or independent upstream and midstream players, is making significant strategic bets,” she said, referring to production and transportation companies. “I’ve been in this business 27 years, and I’ve never seen as many alternative paths as companies seem to take today.”
NYT
PUBLISHED: 7 HOURS 10 MINUTES AGO | UPDATE: 7 HOURS 9 MINUTES AGO
Oil and gas glut sparks merger boom
Many of the businesses involved in deals are energy infrastructure businesses, which tend to be set up as master limited partnerships, or MLPs. Photo: Bloomberg
conRAD DE AENLLE
The merger boom in the energy sector shows no signs of slowing.
As energy production in the US rises substantially, pipeline and storage companies will look to expand capacity through acquisitions, industry analysts and investors forecast.
“Companies are lining up to take advantage of this production-growth story,” said Quinn Kiley, a manager of energy infrastructure investment portfolios for Advisory Research Inc. “Companies have huge opportunity sets in front of them.”
Figures from the federal Energy Information Administration highlight the extent of the growth. US energy production has reversed decades of stagnant or falling output in recent years. Oil production has gained 49 per cent and natural gas output has increased 28.5 per cent, from their lows in the mid-2000s through to last year. Reserves that are economically viable to recover are up sharply, too, the agency’s website says, providing energy companies a greater incentive to invest.
“As technology gets better, it makes production from some formations profitable and predictable and productive over a long period of time,” Mr Kiley said. “That leads to a changing dynamic for companies that transport and store this supply.”
Merger activity has been strong this year in the energy sector in the US, says data from Thomson Reuters. About $US123 billion ($131.44 billion) in energy mergers were announced from January through to last month, up 47 per cent from the period a year earlier, the data showed.
Many of the businesses involved in deals are energy infrastructure businesses, which tend to be set up as master limited partnerships, or MLPs. These are tax-favoured vehicles that in the early part of their lives are encouraged to expand as rapidly as possible for complicated reasons related to how they distribute income from their operations.
Deborah Byers, managing partner at Ernst & Young in Houston, said: “You can’t be an MLP without being a bit of a deal junkie. You have to grow your base constantly to pay the distribution.”
‘KINDER MORGAN NEEDS CHUNKY ACQUISITIONS’
MLPs are likely to keep merging, even though a pioneer of the structure, Kinder Morgan, is abandoning it. Other potential buyers were expansion-minded pipeline companies, said Todd Williams, an energy analyst at Westwood Management. Even Kinder Morgan – the industry leader, with 80,000 miles (129,000 kilometres) of pipelines – had “holes in its asset footprint,” he noted, particularly in the Marcellus shale formation in the Northeast and the Bakken deposits in Montana, North Dakota and adjoining parts of Canada.
Possible takeover targets that were pipeline operators for Kinder Morgan included Oneok Partners in the Bakken field and MarkWest Energy Partners and Williams Inc in the Marcellus, he said. They are the right size in the right places, in his view.
“Kinder Morgan needs chunky acquisitions” worth above $US5 billion each to have a meaningful effect on growth, Mr Williams said. The entities he mentioned had market values of $US13.5 billion to $US44.2 billion as of Wednesday.
Mr Kiley agreed that Kinder Morgan could pursue MarkWest. But he sees Williams, which has extensive assets throughout the country, as so big that a bid would run afoul of regulators.
A business that Mr Kiley finds ripe for a Kinder Morgan-style consolidation is Energy Transfer Equity, an MLP that controls four others involved in various activities. It recently announced plans to buy Susser Petroleum Partners, which operated gasoline stations, he noted.
It also might create a conventional corporation to hold some of its own equity and then have an initial public offering, he said, to attract investors for whom an MLP’s tax breaks are wasted, such as holders of tax-free retirement accounts.
Ms Byers of Ernst & Young considers the outlook for deals so extensive that certain companies could be either buyers or targets, including Anadarko Petroleum and Marathon Petroleum. Large foreign energy conglomerates, like Cnooc in China and Total in France, were also possible bidders, she said, adding that if foreign buyers were enticed into the market, they would have plenty of company.
“Everybody, whether big integrated players or independent upstream and midstream players, is making significant strategic bets,” she said, referring to production and transportation companies. “I’ve been in this business 27 years, and I’ve never seen as many alternative paths as companies seem to take today.”
NYT