CERAWEEK-US pipeline firms poised to follow biggest customers into M&A

By David French and Arathy Somasekhar

HOUSTON, March 21 (Reuters) -

U.S. energy pipeline and storage operators have spent two years watching the consolidation of oil and gas producers, and now they are gearing up for the merger wave to hit their sector, executives, investors, and analysts said.

The midstream sector has a lot of specialized midsize firms and only a handful of very large operators able to provide the services across a wide geographic footprint. Mergers will result in more suppliers able to provide processing, transport, storage and export services, according to executives and dealmakers.

There were $12.5 billion of midstream deals announced through mid-March, compared with $21.9 billion for all 2023, according to researcher Enverus. If the current pace holds, this year will be the biggest for midstream mergers and acquisitions since 2019.

Scale "is definitely important," Williams Companies Chief Operating Officer Michael Dunn told Reuters on the sidelines of the CERAWeek by S&P Global conference. "Continuing to expand is certainly one of our goals."

Due to the hurdles of getting new energy infrastructure approved and built, it can make more sense to buy a company than put steel in the ground yourself, Pierce Norton, CEO of Oneok said in an interview at CERAWeek.

Oneok bought Magellan Midstream last year, to expand its natural-gas business into refined products and crude transportation.

HOW DEALS WILL UNROLL

A consolidation wave in midstream would skip the initial phase of private-company deals that enveloped shale companies and jump straight to strategic combinations, said those working on such deals.

"There are not too many private midstream businesses of scale left, as many were sold in recent years, so further public midstream consolidation is inevitable," said Pete Bowden, global head of industrial, energy and infrastructure at Jefferies Financial Group.

This year, Sunoco agreed to acquire storage provider NuStar Energy for $3.9 billion, and EQT Corp announced it would buy its former spinoff Equitrans Midstream for $5.5 billion.

The EQT deal will "reduce our cost structure to a level where we can withstand the negative stress case of prices like the $2 (per million British thermal units) we see today," said EQT CEO Toby Rice. That price is less than a third of the average for 2022.

Other deals are percolating: Occidental Petroleum is weighing options for its controlling stake in Western Midstream Partners, Reuters reported last month. Summit Midstream Partners last week said it was in the advanced stages of a review of strategic alternatives.

Like the shale producer combinations, the coming wave of midstream deals will not be salvage jobs of last decade. U.S. midstream companies are in a position of strength having cut debt and switched to fee-based business models less exposed to commodity price swings.

Scott Wexler, head of North American midstream at Citigroup , said companies are trading below 3.5-times debt-to-EBITDA, compared to more than 4-times prior to the COVID-19 pandemic.

"It makes it easier to go out and do deals, in particular when the rest of the universe has fixed themselves and so those combinations don't put in peril your strategic objectives," he added.

RESHAPING INDUSTRY

A similarity to shale combinations is midstream's need for greater scale to cover more shale basins, to share the costs of methane reduction and to deliver immediate shareholder returns.

"Some of the deals we've started to see are midsize public companies where the management teams are realizing they have carried the ball as far as they can on their own," said Michael Casey, head of midstream and downstream at Wells Fargo .

Greater scale will allow companies to earn more by delivering more services.

"The more I can touch that molecule, the more margin I can realize. People are looking at ways to further their opportunities to do that," Casey explained.

As their existing contracts expire in coming years, the newly enlarged oil and gas producers will look to pare suppliers to cut their cost of business.

"As these (producers) have been getting bigger, one would expect this to be followed by a renewed focus on the part of the midstreamers to follow suit," said Jefferies' Bowden. (Reporting by David French and Arathy Somasekhar in Houston; Editing by David Gregorio)