Why midstream mergers and acquisitions remain active (Part 2 of 3)
October’s midstream deals and earnings reports
These recent large transactions reaffirm that companies are feeling bullish about the environment—especially midstream assets located in high-growth oil and gas plays. Buyers have noted that they continue to see very strong growth prospects from the acquired assets over the next few years.
For instance, on the call regarding Regency’s acquisition of PVR Partners, Regency management noted, “We have a strong belief in the long-term demand for natural gas, and we will continue to focus on expanding our footprint in the most prolific gas and liquid plays in North America… Further, the addition of PVR’s asset base provides significant diversification into attractive high-growth region and enables the combined firm to capitalize on the long-term momentum of North American gas production growth, which, in turn, leads to greater cash flow stability… the combination puts Regency in a position in the Appalachia Basin with the Marcellus and Utica, which every report you have read indicates that’s going to be one of the premier basins for growth over the next several years, and we think that’s a very strategic position to be in.”
On the call regarding Crestwood’s acquisition of Arrow, Crestwood emphasized its belief in the continued rapid growth of the Bakken play, which is situated in North Dakota, and noted that its projections of a previous acquisition in the area had been consistently surpassed. To provide some context, the above graph shows crude oil production in North Dakota since 2005, and substantially all of the growth has come from the Bakken play. Crestwood management stated, “The fact that it’s (the acquisition) accretive in 2014 and meaningfully accretive in 2015 and beyond is simply a reflection of the significant amount of growth left in the Bakken Shale, and the fact that we are buying a business that is located in the core of the core of the Bakken Shale, and that’s my second point. This is a great crude oil and rich gas gathering business that we’re acquiring from Arrow… If you are looking at Bakken production growth… we did a lot of analysis around what the potential for production was going to be in the area around the COLT acquisition. And I can tell you that actual has outstripped every production estimate that we looked at. And remember, that was a little less than a year ago that we made that acquisition. So we feel very good about the long-term potential of Bakken production and where our assets sit in that production.”
Note that Buckeye’s acquisition of terminal assets from Hess was unlike the other two in that it wasn’t targeting midstream assets in a high-growth oil and gas play. Hess Corp. had been looking to sell off various assets to simplify itself into a pure play exploration and production (E&P) company, of which these terminal assets were outside that scope. Hess was a motivated seller, and the assets fit in well with Buckeye’s existing portfolio. Plus, Hess is structured as a C-Corp and Buckeye is structured as an MLP—see Master limited partnership (MLP) basics. Because Buckeye doesn’t have to pay corporate-level taxes, it allows the company to pay a higher multiple than what Hess may have valued the assets at.
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