Three years out of business school in 1994, Greg Reid, now president and CEO of the MLP business at Salient Partners in Houston, stumbled upon the relatively new business structure of MLPs. He had started his career at Goldman Sachs and was working with high net investors and family offices when he spotted MLPs on the market that were pulling yields of 9% and 10%.

“No matter how much money you have, you want some income on your investments,” Reid told Midstream Business. “I luckily just bought into MLPs, and about 10 years later, I came to the conclusion that MLPs were going to become a bigger opportunity as they were expanding. The returns were quite good.”

Reid also concluded there should be an MLP money manager in Houston, and he went to work founding RDG Capital. In 2007, the two biggest MLP firms were in Los Angeles and Kansas City, he said, but most of the MLPs themselves were based in Houston.

“In fact, today, 70% of the MLPs that are public are all based in Houston. Yet, the two largest managers in the country back in those days were out of state. That was the original theory—build a company here, leverage off our contacts that we had built over 17 years, hire a bunch of smart MLP analysts, and we’ve become a very good stock picker over that time period,” he said.

In 2010, Reid’s $1 billion firm merged with Salient Partners, which had about $7 billion in assets.

Many of the early MLP investments remain at the top of their field. Reid has long invested in Enterprise Products Partners LP, Plains All American Pipeline LP and Targa Resources Corp.—all based in Houston—as well as Energy Transfer Equity LP in Dallas. Kinder Morgan Energy Partners was also an attractive buy, he said. However, last year, parent Kinder Morgan Inc. rolled up its MLPs into the primary corporation.

A niche within MLPs

And while those early names are on most MLP investors’ shortlists, Salient has found a niche: buying into the parent companies, or general partners.

“Probably our biggest area of expertise is we have figured out the opportunity set of owning MLP general partners as well as anybody, maybe better, than other [firms]. And that’s a pretty interesting opportunity set,” Reid said. “There are 18 publicly traded general partners now and there are approximately 130 MLPs, so a relatively small subset is in general partners, but about 40% of the market cap of the industry is in general partners.”

As Reid explained, the Alerian MLP Index doesn’t cover the general partners.

“That creates a huge opportunity for us because we can think outside the box and own companies that are not in the index,” he said. “Many investors prefer to own the index [covered businesses], and that creates less competition for us to buy the general partners.”

That’s perhaps one edge that’s grown Salient Partners, which was started in 2002 with 10 people and about $1 billion in assets, to 160 employees, with offices in both Houston and New York, as well as about $22 billion in total assets. The MLP business alone is worth about $4.5 billion.

Discounted deals

Reid looks at the current industry environment—in which crude oil prices have plummeted 50%—as a potential opportunity for Salient, too.

“We aren’t looking for oil companies to buy. We’re buying MLPs. It’s our view that it is a great time to be looking for ‘bargains’ in the midstream, such as non-commodity sensitive parts of the MLP market. There are some good buys, and we believe this may be the time to look at the space because prices continue to be depressed. There’s a lot of tax-loss selling going on, and there are some potential bargains out there,” he said. “People are confused. They’re scared. They’re worried about crude oil falling to $30 [per barrel]. It seems highly unlikely that in a growing economy we’ll see it drop 75%. But people are whispering $30 barrels all around Houston.”

The midstream has long had one of the more predictable cash flows in the energy sector because it’s mainly a fee-based business, Reid said.

“In midstream, what they care about is, ‘Are there barrels going through the pipeline and potentially, even more barrels?’ Midstream pipelines are going to have more barrels of crude oil going through them in 2015 than they did in 2014 so their cash flows are going to grow,” he explained. “That’s a pretty good place to be when you don’t know where the price of crude oil is going to go.”

As such, midstream MLPs aren’t likely to be forced into making the distributions cuts that appear destined for many upstream MLPs, he said. Upstream Linn Energy LLC, for example, recently announced it would cut its quarterly dividend by 57%.

Consolidations coming

Reid noted the wave of consolidations in 2014, and said he expects significant mergers and acquisitions in the midstream to continue. And, there will be several entities among the buyers: Richard Kinder, CEO of Kinder Morgan, has already expressed interest in acquisitions; larger cap companies can buy smaller ones simply by issuing stock or doing stock-for-stock deals.


White Cliffs Pipeline has 100,000 barrels of crude oil storage at its Platteville, Colo., terminal to serve the 76,000-barrel-per-day line. Source: SemGroup Corp.

“I expect 2015 to be a very active year and what will help it along will be stabilizing commodity prices,” he said. “We don’t want a freefall market. Going to $35 will freeze people, but if it stabilizes in our $45 to $75 range for a while, [it may be] a very active time.”

Reid declined to share specific names that might be targets, but he said the buyers are already familiar to the arena: companies like Kinder Morgan Inc., Enterprise Products Partners LP, The Williams Cos. Inc., Energy Transfer, Plains All American and Targa Resources are likely looking for additions.

“The top six companies are likely to be looking at everything,” he said. “They all want to buy things at depressed valuations.”

Reid admitted that declining prices make the business more stressful.


Williams’ Opal, Wyo., gas plant serves as a processing, storage and pipeline hub for Rocky Mountains production. The Williams Cos. Inc. is a major Salient holding. Source: The Williams Cos. Inc.

“I don’t sleep as well when crude oil falls 5% a day,” he said. “I think crude oil is keeping me up at night a little more. I’m worried about the producer risk. For example, Plains All American is the largest crude oil pipeline company in North America. I’m worried about their 1,000 producers. Do any of them have financial problems? Are any of them going to possibly have to cut back on drilling? What’s the spillover effect?”

The 2015 difference

What makes the oil pricing decline different today than in 2008 is that in 2008, the drop from $140 per barrel (bbl) oil to $35/bbl oil was a demand-led correction that sent oil prices down by 75%.

“I think the lesson learned is, commodity prices are really volatile; they’re based on supply and demand and fear and greed. But what we had in 2008 was a demand-led drop, meaning that the world went into recession and was teetering on depression. So when the world goes into recession, people stop buying crude oil because they no longer have jobs,” he said.

The current energy economy is facing a supply-led correction, which indicates the world economy is still performing generally well, he said.

“We have strong demand, but the U.S. energy renaissance has become such a big deal. We actually have too many barrels out there and prices are falling as we’re oversupplied.”

The way to fix excess supply is to “stop producing while demand grows,” Reid said. But it’s a proposal that has little support among OPEC countries competing with the U.S. for the oil market share.

“We’ll probably see a pretty significant 20% to 30% drop in the rig count. We’ll see layoffs in Houston most likely as well. Oil service companies will lay off people. Producers will lay off some people and cut back on production, but we’ll keep growing production because of the number of wells drilled,” he said.

The numbers suggest today the industry will add about 700,000 incremental bbl in 2015, down from 1.1 million new bbl in 2014, so the oversupply is shrinking, but not going away. Meanwhile, Saudi Arabia and Russia are still producing at full steam, too.

“We can all fix this problem by cutting a million barrels, but we’re only going to do it together—not separately,” he said. “I think we’ve got a classic glut here.”