After midstream deals hit a three-year high in 2014, midstream transaction values are poised to continue strong in 2015, according to the Deloitte’s “Oil & Gas Mergers and Acquisitions Report—Year-end 2014.”

Three midstream transactions were among the top 10 merger and acquisition (M&A) deals of 2014, and already in the new year seven of the top 10 deals to-date were in the midstream sector.

In 2015, the largest announced transaction in the sector so far is the merger of Energy Transfer Partners LP with Regency Energy Partners LP, with a transaction value of $18 billion. The deal is expected to close in the second quarter of 2015.

Harold Hamm, CEO of E&P Continental Resources Inc., also sold his MLP Hiland Partners LP to Kinder Morgan Inc. for $3 billion, putting the midstream transaction value for the first quarter above $22 billion.

Top 10 First-Quarter 2015 Announced Deals, as of Feb. 12



Source: Hart Energy

Deloitte put the midstream deal value at $80 billion. The year is complicated by Kinder Morgan’s assembly of its midstream entities through three transactions into one giant company. The value of the transaction was about $76 billion.
Depending on how deals are counted, 2014 was decidedly strong, with announced North American transactions valued at $132.8 billion, according A-DCenter.com data.

Not invulnerable

While the midstream is still influenced by fluctuations in commodities prices, its prevailing structure of fee-based contracts gives it more stable cash flows than found in the upstream sector. Those stable cash flows, as well as several global developments, should help the midstream sector sustain the growth it has experienced recently, even if at a slower pace than previously expected, the report said.

“With some upstream activity being suspended going into 2015 in response to oil market conditions, pricing on midstream assets may relax,” the report said. “Risk-averse investors may seek out lower-risk equity investments, such as long-haul natural gas pipelines, particularly while interest rates remain relatively low.”

Natural gas projects are likely well-positioned to withstand the current decline in oil prices, the report noted. Both the regulatory environment in several countries with projects in development and current international trade dynamics support moderate demand growth for natural gas through 2020, and increase the potential for investment in natural gas assets. However, the drop in prices will likely lead to postponement of some LNG projects in very early stages.

“Infrastructure buildouts to support LNG projects in the latter stages of development and that are already contracted, primarily in North America and Australia, will likely have the momentum to withstand the current commodity price slump; however, LNG projects in earlier stages of development may be delayed or cancelled outright,” the report said.

Storage assets may also be an international investment target in 2015, according to the report.

Two factors could embolden investors in the storage area. The first is “an increase in oil purchases for onshore commercial storage, particularly in China where independent operators are permitted to operate oil storage facilities and have been aggressively increasing capacity,” the report said. Second is “the prospect of higher than usual global oil price volatility, as demonstrated through crude oil futures.”

A number of other factors also contribute to a positive North American midstream M&A outlook, the report said. Demand for natural gas as a transportation fuel and as a cleaner energy feedstock for power generation than coal is expected to continue driving pipeline system expansions.

The Keystone XL Pipeline remains in limbo. Congress passed a bill Feb. 11 to construct the line but President Barack Obama is almost certain to veto the legislation. While the standoff continues, any growth in exports of Canadian oil through U.S. terminals would increase demand for barges and crude-by-rail infrastructure. Also in Canada, the potential buildout of the Energy East project would require large capital injections with the potential to attract investors. Finally, energy reform in Mexico is leading to calls for investment on a variety of infrastructure projects with the potential to attract investors.

Nevertheless, the midstream sector isn’t invulnerable to challenges the energy industry faces from greatly reduced oil prices. The most exposed companies in this pricing environment are those that “aggressively acquired pipeline assets and now face project delays and reduced throughput extending beyond 2015,” the report said.

With challenged commodities prices, “private equity, infrastructure funds and other investors that have facilitated the expansion of gathering, processing and pipeline systems will soon need to discern which capacity enhancements will need to be postponed or canceled as upstream producers reprioritize projects with output destined for the infrastructure.”