Opportunities said to exist for more M&A activity in US gas storage market

Houston — The intermittency of renewable power generation and growth in liquefaction capacity could spur M&A activity in the US natural gas storage sector.

At the same time, fairly weak valuations suggest interested buyers and sellers will be limited and largely opportunistic.

That was the perspective from midstream investment experts as S&P Global Platts' annual gas storage outlook conference wrapped up in Houston on Wednesday. There was a consensus among market participants that connectivity between producing assets, transmission assets and distribution or export assets will be key to the equation.

"At the end of the day, we have to figure out how to crack the code, and pipelines will be part of that," said Scott Smith, president, midstream assets, for Spire Energy, a St. Louis-based gas utility that also operates gas storage facilities.

Smith and Jason Satsky, a managing director at Bank of America Securities, provided an overview of recent merger, acquisition and divestiture activity. They also addressed spreads and assets values for the North American gas storage sector and the challenges of integrating storage assets into an existing portfolio.

They agreed that there are opportunities for private equity firms to snap up more storage tied to key shale basins, given that in the current price environment, it is much cheaper to buy than to build new capacity.

"The infrastructure money, and there is a lot of it sloshing around, the issue with those guys is they don't love beta and they don't love merchant exposure," Satsky said. "Then you have the traders, who look for intrinsic value."

One example: in February 2019, Sempra Energy completed the sale of its non-utility gas storage facilities to an affiliate of investment firm ArcLight Capital Partners for $328 million. ArcLight affiliate Enstor took over operation of the facilities.

On the flip side, in September 2019, a midstream affiliate of publicly traded utility operator New Jersey Resources announced an agreement to acquire Leaf River Energy Center, from a unit of Australian investment bank and financial services firm Macquarie for $367.5 million. Traditional energy companies that are looking to expand their footprints are being more cautious with how they spend their capital.

"The story in midstream generally is one of kind of 'show me,'" Satsky said. "Management teams are generally focused on making due with their own cash flow, not being in the market to raise money, be it equity or debt. I think there's a little bit of hunker down in the fortress and figure out what we're going to do with our cash."

Generating more interest in gas storage assets also could come down to how the industry markets itself.

"I think there is a lot of drumbeat on the decarbonization front," Satsky said. "I think there's a really important and compelling point to be made on the gas side. Frankly, as it comes to power, gas is not something you can take out of the equation, at least until you get batteries that are far beyond the capabilities of anything that we have today."