Occidental Petroleum (NYSE: OXY) has promised investors that it would sell between $10 billion and $15 billion of assets to help pay for its pricey acquisition of Anadarko Petroleum (NYSE: APC). The oil company has already agreed to flip Anadarko's African assets to French oil giant Total for $8.8 billion. It's now pressing forward with its next deal, which would see it unload a portion of its sizable stake in midstream MLP Western Midstream (NYSE: WES), according to a report by Bloomberg.
Given Western Midstream's attractive asset base, it could draw significant interest from buyers. That makes it an intriguing company for investors to watch in the coming months, especially those focused on income, since Western Midstream currently pays an enticing 8.2%-yielding distribution.
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Drilling down into the report
According to the Bloomberg report, Occidental Petroleum is seeking a buyer to take majority control of Western Midstream. The oil company will inherit Anadarko's 55% interest in the MLP when its acquisition closes. It's hoping to unload about half that stake to help pay for the purchase of Western's parent. Potential buyers of Occidental's interest would also likely buy out the 45% of Western Midstream that's currently publicly traded. That would enable a buyer to hold a majority stake in the company while allowing Occidental to retain a minority interest. That way, it can maintain some operational and financial control over the infrastructure that's crucial in transporting its production to market centers.
While Occidental Petroleum has a long history of owning midstream infrastructure, the company recently parted ways with its Permian pipeline operations. Last year, the company cashed in on its oil gathering and storage business as well as its stake in a storage and export terminal near the Corpus Christi Ship Channel in two deals valuing the operations at $2.6 billion. That price netted it a premium of 14 times earnings, which was well above the 8 to 12 times earnings that midstream assets typically fetch.
Hoping for another bidding war
Occidental has already hired advisors to help it find a buyer for Western Midstream. According to Bloomberg, interested parties will likely include private equity firms as well as rival pipeline companies such as ONEOK, Enterprise Products Partners, and Energy Transfer.
Western Midstream would undoubtedly be of interest to private equity, which has been increasingly investing in midstream assets. Blackstone, for example, teamed up with several investors to acquire a controlling interest in Tallgrass Energy earlier this year. It paid $3.2 billion for the stake in Tallgrass, which operates midstream infrastructure across 11 states and has several large-scale expansion projects in development.
Meanwhile, leading asset manager Brookfield Asset Management has been investing in midstream assets through its infrastructure arm, Brookfield Infrastructure Partners. The companies recently teamed up to acquire Enbridge's Western Canadian gathering and processing business. That's likely the first of many deals, given Brookfield Infrastructure's estimate that U.S. midstream companies need $150 billion of capital over the next five years to support their growth projects as well as the continued consolidation of the MLP market.
On top of making acquisitions, private equity funds have invested in midstream start-ups as well as in infrastructure projects developed by publicly traded energy companies that needed funding.
Large-scale MLPs like Enterprise Products Partners and Energy Transfer as well as pipeline companies such as ONEOK also seem like logical bidders for Western Midstream. Not only would it enable them to increase their footprint in the Permian Basin, but they'd benefit from the company's position in the DJ Basin. However, U.S. midstream companies have become increasingly focused on improving their investment returns in recent years. As such, they're not as interested in large-scale M&A transactions, since those typically require paying a high premium, which eats into returns. With that in mind, most publicly traded midstream companies will likely pass on bidding for Western Midstream unless they see it as a perfect fit.
This deal has private equity written all over it
Occidental Petroleum would like to monetize at least half of the Western Midstream stake it will soon acquire when it takes control of Anadarko Petroleum. While it would love to see a bidding war emerge for Western Midstream, that seems unlikely given that most publicly traded midstream companies don't seem very interested in large-scale M&A these days. So its best hope for maximizing the value of this position is for private equity players to bid against themselves. While that might happen, investors shouldn't buy Western Midstream in anticipation of a buyout, since a big premium might not materialize.
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Matthew DiLallo owns shares of Brookfield Asset Management, Brookfield Infrastructure Partners, Enbridge, and Enterprise Products Partners. The Motley Fool owns shares of Brookfield Asset Management and Enbridge. The Motley Fool has a disclosure policy.