While the upstream mega deals in the U.S. shale patch have been drawing the most market attention, pipeline operators are also embarking on a merger spree in a quest to add scale, optimize assets, and gain more exposure to export markets.The next big midstream deal could be one involving a major U.S. oil and gas producer that has recently announced a large upstream acquisition to add acreage and scale in the top-producing shale basin, the Permian.
Occidental Petroleum, which has recently announced a $12-billion deal to buy CrownRock, is now considering a sale of its $20 billion natural gas pipeline operator Western Midstream Partners, sources with knowledge of the plans told Reuters this week.Currently, Occidental owns 49% of Western Midstream, a master limited partnership. It also owns its general partner, and as such, it controls Western Midstream’s operations.
Interested parties in Western Midstream could include pipeline giants Enterprise Products Partners, Kinder Morgan, and Williams Companies, according to Reuters’ sources.A potential deal could allow Oxy to reduce part of the $18.5 billion debt it accumulated from its $54 billion acquisition of Anadarko in 2019.
A sale of Western Midstream will also continue the M&A frenzy in the pipeline segment, where the major deals of recent months have been overshadowed by the blockbuster upstream acquisitions announced by ExxonMobil, Chevron, and Occidental, among others.
While the biggest U.S. oil and gas producers were announcing major acquisitions, pipeline operators were also busy consolidating.
Last year, ONEOK said it would buy Magellan Midstream Partners in a cash-and-stock deal valued at $18.8 billion, creating a combined U.S. oil and gas pipeline giant with a total enterprise value of $60 billion.“This acquisition creates a more resilient energy infrastructure company that is expected to produce stable cash flows through diverse commodity cycles,” ONEOK said at the time.
After the merger was completed in September, the resulting company now owns more than 25,000 miles of liquids-oriented pipelines, with significant assets and operational expertise at the Gulf Coast and Mid-Continent market hubs.In another deal last year, natural gas pipeline operator Energy Transfer bought midstream energy company Crestwood Equity Partners in an all-stock deal valued at around $7.1 billion, including the assumption of $3.3 billion of debt.
The midstream merger frenzy continued into 2024, with gas station owner Sunoco LP announcing in January that it would buy pipeline and liquids terminal operator NuStar Energy in an all-equity transaction valued at around $7.3 billion, including debt.The merger diversifies and adds scale to the business, as well as captures the benefits of vertical integration, Sunoco said.
None of the midstream deals came as a surprise to analysts, who have been expecting consolidation in the pipeline space for some time.“Public midstream companies have been on an acquisition spree in 2023,” East Daley Analytics said in December, adding that it expects the robust M&A activity in midstream to continue in 2024.
“One thing is certain: midstream is in a position where it can afford to go on a buying spree,” East Daley Analytics noted, as growth capex excluding M&A has dropped by 30% since 2019 and free cash flow after distributions has swung from negative to positive.“With excess free cash flow and a reduced need for large greenfield projects, companies can look to M&A to drive growth and improve their competitive positioning,” East Daley Analytics said.According to analytics firm RBN Energy, after the frenetic build-out of pipeline infrastructure in the past decade to accommodate soaring U.S. oil and gas production, many public pipeline operators are now looking to boost scale and scope, while private-equity-backed firms are looking to cash in .
“Now, with many publicly held companies looking to gain further scale and scope — and many private-equity-backed midstream companies looking to cash in on their well-timed, well-planned developments or combine with other privately held firms to improve their synergies (and maybe make themselves even more attractive M&A targets in the future) — it could be argued that conditions for large-scale midstream M&A have never been better,” RBN Energy analysts wrote in October.
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