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Midstream Acquisitions Fell Off A Cliff In 2020 As Industry Uncertainty Abounded

Acquisitions appear off the table for most midstream enterprises this year considering uncertain operating, financial, and regulatory environments that have been further intensified by the pandemic.

Looking ahead, even large diversified midstream enterprises with deep balance sheets are unlikely to wade into major company acquisitions at such a time of volatility.

The subdued acquisitions environment hearkens back to prior periods of market dislocation. However, the present landscape has the added veneer of the pandemic, potentially heightening unpredictability for the industry for years to come.

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In 2020, as in several recent M&A interludes, significantly lower commodity and equity prices, as well the expectation for oversupplies and dampened demand expectations the next several years are some of the variables at play. In addition, a broad-based societal drive for energy transformation has only seemed to gain steam amid the pandemic.

The industry has lost its positive conception in recent years within a significant breadth of society and many large investors that track environmental, social and governance issues and compliance have begun a transformational shift of capital to other industries.

2019 was marked by a substantial decrease in the size of opportunistic acquisitions of midstream companies by other midstream enterprises. This reduction in activity likely stemmed from several factors. Generally depressed equity values throughout most of the midstream space, more expensive equity capital, lower availability of debt, and a continued focus by the majority of the midstream industry on maintaining finances within operating cash flows, drove corporate appetite for acquisitions into the ground by the fourth quarter of 2019.

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Industry and investor confidence in 2019 also suffered from the stalling of several large and highly visible pipeline projects in late 2018. These projects had reached the height of development and appeared on the path to completion but were sidelined by landowner and environmental group actions, driven by increasing negative sentiments toward the natural gas production, transportation and utility industries.

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While some regulatory certainty has been attained in 2020 through several supportive decisions in June and July by the U.S. Supreme Court, considerable headwinds still remain for the pipeline industry. The decision by Dominion Energy Inc. and Duke Energy Corp. to discontinue the Atlantic Coast Pipeline could presage the mothballing of other high visibility midstream infrastructure projects this year.

Considerable adjustment may be on the horizon for the upstream and midstream industries if there is a change in U.S. president in 2021. The democratic front-runner Joe Biden may drive significant changes to the energy regulatory system and may more firmly focus federal support on renewable energy, rather than fossil supplies and systems. Biden has signaled his intent to comply with international climate accords and prepare for the eventual transition away from non-renewable energy.

Regulatory Research Associates is a group within S&P Global Market Intelligence.

For a full listing of past and pending rate cases, rate case statistics and upcoming events, visit the S&P Global Market Intelligence Energy Research Home Page.

For a complete, searchable listing of RRA's in-depth research and analysis, please go to the S&P Global Market Intelligence Energy Research Library.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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