Some investment firms are struggling to unload their midstream assets as their portfolio companies run into roadblocks in both the public and private markets, industry experts said.
There are firms, such as Blackstone Group Inc. and IFM Investors Pty. Ltd., that are seeing success in taking public pipeline companies private, mainly by coughing up above-market-value prices for midstream operators selling at a discount. But others are facing notable setbacks to unloading what they already own amid a stunted IPO environment.
For instance, Blue Racer Midstream LLC's IPO is on ice after a Delaware court recently ruled that EnCap Flatrock Midstream cannot move forward with the offering under the current arrangement with partners Williams Cos. Inc. and Oaktree Capital Management LP. TPG Capital Management LP, meanwhile, scrapped a nearly $1 billion deal to buy Tailwater Capital LLC's Goodnight Midstream LLC, which had previously targeted a $2 billion IPO.
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"It is interesting that private-backed midstream firms ... are struggling a bit," Morningstar's Stephen Ellis wrote in an email. "The firms that are attempting to go public must really need the equity infusion. In other words, they might be too leveraged or struggling with a weaker than average outlook, which might simply create more roadblocks to going public."
The Goodnight Midstream deal fell apart because the produced water disposal specialist with operations in the Permian and Williston Basins and the Eagle Ford Shale failed to meet deal closing conditions that included securing a contract with an unnamed oil company. According to CBRE Clarion Securities portfolio manager Hinds Howard, that could indicate buyers are becoming more wary in general as Permian drillers trim spending.
"It does feel like private equity deals that were done in the last few years that had leverage added on to them post-deal close should be at risk of low returns if Permian producer capital discipline rules the day for 2020 budgets," he said in an email. "That should have the effect of instilling some caution in the private equity buyer pool about the attractiveness of midstream assets."
Blue Racer's efforts to take its gas gathering and processing business in the Utica and Marcellus shales public, on the other hand, was already at a disadvantage before EnCap Flatrock's partners pursued litigation. Appalachian gas pipeline operators are bracing for a potential wave of negotiations for reduced transportation rates amid a lower-for-longer natural gas price outlook that could hit smaller providers hard.
"I would be very surprised if there was a midstream IPO [during] the remainder of this year and would be shocked if it were to be an IPO of a [gathering and processing] business operating in the Northeast," Howard said.
Interest in taking public midstream companies private, on the other hand, "seems solid," according to Morningstar's Ellis. Still, Blackstone has run into opposition from Tallgrass Energy LP shareholders who want a higher buyout offer from the firm after the gap between what Blackstone plans to offer public unit holders and some members of Tallgrass' management team raised serious concerns about corporate governance.
Blackstone is also one of many private equity firms reportedly interested in snapping up a majority stake in Western Midstream Partners LP from Occidental Petroleum Corp.

