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Pipeline giants stick to core areas as private equity fills in 'white spaces'

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Essential Energy Insights - September 17, 2020

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Pipeline giants stick to core areas as private equity fills in 'white spaces'

Big North American pipeline companies are comfortable focusing on their core positions as private capital expands its reach in the midstream oil and gas space, pipeline CEOs said at a conference.

The pipeline industry has been plagued since a crude oil price downturn that started in 2014 sent midstream stock prices into a tailspin. But even though sector heavyweights have turned to joint ventures and self-funding to retain more cash on hand, private equity has rushed in to fill the gap by putting capital to work on a slew of new projects while also targeting existing midstream infrastructure.

At the same time, ONEOK Inc. is not concerned that private companies will usurp its NGL takeaway capacity, focused in the Rockies and Midcontinent. "There's a wide and deep moat around those businesses," CEO Terry Spencer commented during the Barclays CEO Energy-Power Conference in New York on Sept. 5. "It's been difficult for competitors to penetrate those contract dedications. So we have seen them be successful and thrive, yet not necessarily take business from us, and vice versa."

While Targa Resources Corp. CEO Joe Bob Perkins said private equity is not affecting his company's natural gas and crude oil gathering and processing margins in the red-hot Permian Basin, Targa is limiting growth to areas that make sense for existing infrastructure.

"At the request of customers, we've tried to propose on 'white space' areas," he said at the conference. "Can't think of many places where we've won it, but private equity is competing for that because ... they want a beginning. They want a set of infrastructure to try to leverage."

At the same time, most public midstream companies are avoiding the kind of corporate M&A that would put them back on offense.

"We've always felt like consolidation was just around the corner. It's never really seemed to happen," ONEOK's Spencer said. "Most companies are so focused on their organic growth opportunities. ... And the returns that we're generating on these organic growth opportunities that are 4x to 6x are so compelling ... you don't need to move forward any sort of M&A opportunity."

One exception to that is the pending merger between MPLX LP and Andeavor Logistics LP once MPLX parent Marathon Petroleum Corp. completes its $23.3 billion acquisition of Andeavor Logistics' sponsor, Andeavor.

When it comes to asset-specific opportunities, Kinder Morgan Inc.'s NGL transportation business could be up for grabs after Kinder Morgan Canada Ltd. sold the Trans Mountain pipeline system to the government of Canada for approximately C$4.5 billion.

"There are plenty of midstream players, including people with complementary positions to ours, who we think will be interested," Kinder Morgan CEO Steven Kean said. The multiple at which a set of midstream assets like these would trade, there's a dilutive effect there, and so whether [Kinder Morgan] could make that number those numbers — work, I think, is very much an open question."