Surging US production has made oil and gas midstream operations attractive investment prospects, three Deloitte specialists said during the final day of the financial services company’s 2014 Washington Energy Conference.
“It’s a large footprint already,” said John England, who leads Deloitte LLP’s US oil and gas practice. “A lot of companies in it are growing into more aspects of the value chain already, notably Kinder Morgan [Energy Partners LP] and Enterprise [Products Partners LP]. This previously sleepy part of the industry has started to wake up. There’s a lot of private equity looking to go into the midstream.”
He said the US midstream—which includes transportation, refining, gas processing, gas liquids fractionation, storage, renewable fuels, and terminals—grew from 5% of the US industry’s total capitalization in 2005 to more than 20% in 2012.
Nearly 25 midstream firms had enterprise values (EV) of $5 billion or more in 2013, compared with 7 in 2013, England said. KMEP’s $100 billion EV that year made it bigger than independent producers Anadarko Petroleum Corp., Occidental Petroleum Corp., and Apache Corp., he noted.
The sector is even more attractive because many of its operations can be run as master limited partnerships, according to Jed Shreve, a principal at Deloitte Transactions and Business Analytics LLP.
“Growth has been phenomenal,” he said during the May 14 session. “There are about 100 MLPs now, with about 20 in the shadows waiting to [initial public offerings] in 2015.”
Midstream assets suitable
“We’ve seen a lot of independent producers and some major oil companies build out assets to help get their new production to markets,” said Scott Magzen, a Deloitte Tax LLP partner who also participated. “Almost all of these assets would be suitable for MLPs.” Their high dividends which attract investors also make it necessary for them to go to capital markets for acquisitions or to construct new assets, he added.
Operations must have qualifying income to become MLPs, he explained. For oil and gas, this comes from transportation and from exploration and production of nonrenewable resources. “Historically, the [US Internal Revenue Service] has expanded the qualifications for marginal operations with private letter rules,” Magzen said. “It recently pulled back and said it would reevaluate what qualifies because so many operators around the edges had sprung up.”
The prospect of more US LNG exports is stimulating MLP expansion, England indicated. “I think there’s a lot of room to grow,” he said. “Many midstream players believe there are too many opportunities to grow domestically to think about foreign acquisitions. Besides, a lot of foreign midstream assets are nationally owned. We may see some opportunities in Mexico if reforms there are substantial.”
England said the next question may be which companies will be the midstream oil and gas leaders since consolidation appears likely. “I think we’ll see a fair amount of it,” he said. “Right now, there are a number of smaller players working in a single basin. The larger ones will be acquirers.”
Shreve said, “Investors are very excited about this product. The nation needs more infrastructure. I don’t expect tax reform proposals aimed at restricting MLPs. We all learned in kindergarten not to kill the goose that lays the golden eggs.”
Federal permitting reforms
Their observations came a day after the Obama Administration announced major public infrastructure reforms including more interagency cooperation to speed decision-making; synchronized, simultaneous reviews; establishing a federal Infrastructure Projects Permitting Dashboard (IFPD) to make agencies more accountable and transparent; and launching an interagency permitting center to institutionalize reform.
While 3 of the 11 IFPD projects involve renewable energy, officials from the American Gas Association and Interstate Natural Gas Association of America applauded the administration’s announcement.
“While the White House fact sheet does not specifically mention pipeline projects, we hope the administration will work with Congress and various federal agencies to improve the permitting process for interstate gas pipelines,” INGAA Pres. Donald F. Santa said on May 14.
“Pipelines are the key to America’s gas revolution because they are the indispensable link from the supply source to the ultimate gas consumer,” Santa observed.
AGA Pres. Dave McCurdy, meanwhile, said, “As gas utilities plan infrastructure upgrades, these reforms will give utilities more regulatory certainty and will increase early coordination of multiagency permitting processes to reduce costs for utilities and agencies.”
McCurdy maintained, “These reforms will also help ensure that agencies and stakeholders are working together during the permitting process to build on, and consistently implement, best practices for environmental mitigation.”