To date, 2011 has been an active year for mergers and acquisitions (M&A), with total U.S. M&A activity in excess of $800 billion as of the end of third-quarter. This level of activity exceeds the full year results for 2009 and 2010 and is closing rapidly on full year 2008, which came in at just over $903 billion.

In addition, 2011 has also been very active in terms of energy M&A, with about $220 billion of transactions year to date, which exceeds the $201 billion of activity for the full year 2010 and the total of 2008 and 2009 combined.

The deals

In the midstream master limited partner (MLP) space, however, 2011 has set a new record with almost $70 billion of M&A activity, led by Kinder Morgan Inc.'s announced $38 billion acquisition of El Paso Corp. and Energy Transfer Equity LP's announced $9.4 billion acquisition of Southern Union Co.

Other notable transactions include Plains All American LP's $1.2 billion unsolicited offer for SemGroup Corp., Enterprise Products Partners LP's $3.3 billion acquisition of Duncan Energy Partners LP, Energy Transfer Partners LP's $2.9 billion sale of Heritage Propane to Amerigas Partners LP and ETP's and Regency Energy Partners LP's joint $1.9 billion acquisition of midstream assets from Louis Dreyfus Highbridge Energy.

Year to date, the total dollar volume of announced midstream MLP M&A activity in 2011 easily exceeds the previous record of $47.5 billion set in 2010 and is almost double the value of midstream MLP M&A for 2007, 2008 and 2009 combined.

The strategies

The primary underlying rationale for many of these and other transactions is the midstream operator's desire to grow distributable cash flow. The strategies driving the M&A deals are varied.

Some operators seek to acquire assets that are undervalued in their current structure. Others will benefit from combination synergies and moving aggressively into new areas of operation such as the various shale plays.

Meanwhile, some operators are selling slower growth or non-core assets and reducing structural and operational complexity. And some are seeking a lower cost of equity capital through a buy-in of a general partners' incentive distribution rights. But the goal is the same—growing distributable cash flow.

Flow into 2012

The drive to grow distributable cash flow will continue in 2012. Large-cap MLPs will focus on major organic growth projects that have the scale required to provide meaningful growth over the long term and acquisitions similar to those mentioned above.

Small- and mid-cap MLPs will focus on smaller organic growth projects and discrete asset acquisitions that, despite their smaller size, still provide meaningful distribution growth.

A broad trend worth watching in the midstream MLP M&A sector during 2012 is the consolidation in the natural gas gathering and processing space. The trend seems likely to continue, given a number of participants seeking additional scale and the high level of interest in gathering and processing assets with exposure to liquids-rich production.

Propane M&A

Similarly, after years of almost no large scale M&A activity, the retail propane sector appears to be poised for more M&A activity in 2012, driven by three trends.

First, M&A activity in the space seems likely due to the ongoing consolidation of small, privately-held propane companies that do not provide meaningful distribution growth for the larger MLPs.

Second, the natural competitive reaction to recent acquisition activity can drive more deals.

And third, the arrival of new competitors, such as NGL Energy Partners LP, which has announced two acquisitions since completing its initial public offering in May.

NGL transportation

Going forward, the benefits of having substantial downstream natural gas liquids (NGL) assets will drive certain of the midstream MLP M&A activity in 2012 as it did with the Energy Transfer and Regency Energy joint acquisitions of midstream assets from Louis Dreyfus Highbridge Energy.

Given producers' economics for drilling liquids-rich natural gas targets, relative to dry gas targets, in the current and near-term projected commodity price environment, it is apparent that having the downstream infrastructure to solve producers' NGL transportation, fractionation and storage requirements will continue to provide midstream operators a rapidly growing source of fee-based cash flow for the next several years. n

Robert A. Pacha and Raymond B. Strong are senior managing directors for Evercore Partners, an independent investment banking advisory firm that provides strategic advisory services for mergers, acquisitions, divestitures and capital markets transactions. Evercore Partners is currently advising Plains All American LP on its unsolicited bid for SemGroup Corp., Southern Union Co. on its announced transaction with Energy Transfer Equity LP and Kinder Morgan, Inc. on its announced transaction with El Paso Corp.