When Kinder Morgan Inc. announced earlier this year that it was planning on leaving the MLP space by acquiring and moving all of its companies under one corporate umbrella, the first question many had was “Has the MLP bubble burst?” followed by “Is the age of energy consolidation finally upon us?”

Prior to the economic downturn of 2008, there was growing buzz about the possibility of consolidation in the midstream. It isn’t that difficult to understand why: There’s a tremendous amount of money to be made in the sector because of its size, but ironically this size can also serve as a hindrance to growth as it matures by limiting the potential for growth outside of merger and acquisition (M&A) activity.

As the economy has improved and the midstream sector has matured, consolidation movements have begun to take shape. UBS analyst Shneur Z. Gershuni anticipates these moves to continue going forward.

“M&A activity has certainly picked up in 2014 and we believe it is poised to continue as the sector is ripe for consolidation. Rich Kinder hinted that he is looking to be a consolidator following the announcement of Kinder Morgan Energy Partners [LP], Kinder Morgan Management [LLC] and El Paso Pipeline Partners by Kinder Morgan Inc. with his comment, ‘a fertile field to do a little grazing in.’ We concur with Mr. Kinder and also believe more is to come,” Gershuni said in a report titled, “M&A To Be or Not to Be?”

Most of the largest midstream companies utilize the MLP format to grow their companies, but this sector requires consistent growth and many large MLPs are now approaching the end of their rapid growth cycles.

The report also stated that several other factors that could lead to consolidation: the potential for interest rates to rise; the potential for Kinder’s comments to set off an “arms race” where management teams consider whether they want to be the acquiring company or the acquired company in future consolidation agreements; and the depreciation benefits at the C corp level. Additionally, there remains the potential for strategic M&A deals that allow for existing assets to expand into new product offerings or into new territories.

Another question remains for the possibility of “the age of MLP consolidation”: was the Kinder Morgan deal similar to Pennsylvania State University’s entry into the Big Ten in 1990, which turned out to be a harbinger for major collegiate athletic conference realignment that was some time away, or is it akin to the University of Nebraska-Lincoln joining the Big Ten in 2011, which helped create an 18-month period of seemingly constant additions and departures from major conferences?

Should it prove to be the latter, then UBS anticipates that the following MLPs could be ripe for acquisition based on a quantitative ranking screen and fundamental overlay. Based on this formula, the report noted that the top candidates to make acquisition moves as either an acquirer or a target for acquisition include:

  • Kinder Morgan, which stated that one of the reasons for its consolidation was to improve the cost of capital to improve the ability to make acquisitions;
  • NGL Energy Partners LP, which has experienced rapid growth from acquisitions and may try once again to acquire TransMontaigne Partners LP’s general partner (GP) after having a deal fall through in August;
  • Energy Transfer Equity LP has also been a consolidator in recent years and attempted to acquire Targa Resources Corp. this summer, which could be restarted in the next year especially for a company looking to gain exposure into LPG exports. “Energy Transfer’s ability to dissect an acquisition and direct assets to the most appropriate affiliate MLP provides a unique advantage when considering acquisition opportunities,” the report said;
  • Magellan Midstream Partners LP may also seek to make acquisitions in order to fuel growth and maintain momentum, according to UBS. “We believe it will be increasingly difficult to find internal growth projects large enough to sustain the high-teen distribution growth rate beyond 2016,” the report said. Under its current metrics, the investment firm anticipates Magellan’s growth capex to decline 3% over the next three years after growing 8% over the previous three years;
  • SemGroup Corp. could be both an acquirer and a target for acquisition by a larger diversified MLP or GP, according to the report. The company has indicated that it would seek to use proceeds from recent asset sales for acquisitions; however, UBS stated its low valuation and diverse portfolio make it a potential acquisition target on its own;
  • PBF Logistics LP could become active in the acquisition market in order to replace the decreasing dropdowns from its GP;
  • Boardwalk Pipeline Partners LP may become an acquisition target for its GP, Loews Corp., if Loews sees opportunities to acquire gas pipelines in the Marcellus and Utica that it could connect with the Boardwalk network. “While Loews has promised to provide financing to Boardwalk for growth projects, given the current leverage at Boardwalk it could be difficult to make a large acquisition at the MLP level and consolidating into the GP could be financially beneficial,” UBS said;
  • Enable Midstream Partners LP could become a player in the acquisition market based on the newly formed MLP’s investment grade credit rating, size and multiple;
  • Crestwood Midstream Partners LP’s integration challenges and high cost of capital may make it a potential target for acquisition, especially since its assets could fill a gap for potential acquirers;
  • MarkWest Energy Partners LP could be a potential acquisition target due to its assets in the Marcellus Shale; and
  • Enterprise Products Partners LP could be a strategic acquirer in order to further its growth.

The report noted that two companies were screened as potential acquisition targets, but removed based on their strategies or those of their GP: MPLX LP remains focused on acquiring assets from Marathon Petroleum Corp., its GP. Similarly Midcoast Energy Partners LP operates as an MLP dropdown vehicle for its GP, Enbridge Energy Partners LP’s gas assets.

It is difficult to predict when, or if, the MLP sector will begin a period of consolidation, but should it begin there won’t be a shortage of potential targets or acquisition companies ready to move.