The sea of midstream consolidation is calmer than might have been expected so far in 2015, despite conditions that could ultimately precipitate a storm of deals.
“Smaller MLPs, while they may be great monetization vehicles, have a tough time competing over time and that requires additional consolidation,” Eric Kalamaras, CFO of Dallas-based Azure Midstream Energy LLC, told Midstream Business. Those entities are hampered by a low commodity price environment, which makes capital more expensive, while having to compete against much larger partnerships with ready access to unsecured debt.
“Interestingly, despite all these things, you still don’t see a lot of these transactions,” he said. “It’s hard to make the general partner math work. Unless you have a real impetus to do something, it just takes a long time for these transactions to play out.”
One that has is Azure’s takeover of Houston-based Marlin Midstream Partners LP (NASDAQ: FISH), which closed in late February, a deal that fit into the acquisition-oriented company’s long-term strategic goals. Wall Street likes it, too. From the Jan. 15 announcement through early March, Marlin’s price was up 30% to the low $20s and analysts have revised their price targets to as high as $30.
“We went through a host of possible transactions and evaluated close to 20 of them,” Kalamaras said. “The one that we always felt made the greatest strategic sense, the greatest economic sense and had the greatest strategic impact to our goals was always the Marlin transaction.” So Azure proceeded with plans to issue its own IPO in summer 2014. Suddenly, Marlin was paying attention and talks began in earnest.
“What this transaction allows us to do is effectively create a reverse merger into an MLP that we think we are going to be able to triple in size just with our own organic footprint over the next couple of years,” he said. “Just as importantly, it will allow us a really interesting acquisition and consolidation vehicle over time.”
Joseph Markman can be reached at jmarkman@hartenergy.com or 713-260-5208.
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