NEW YORK--(BUSINESS WIRE)--The pace of US midstream merger and acquisition (M&A) activity shows little sign of letting up to close out 2016, according to Fitch Ratings. Modest-sized acquisitions are poised to continue as midstream companies look to grow robustly in a time of slimmed-down capital expenditure budgets.
Should M&A continue, we expect the impact on the sector will likely be neutral, provided issuers continue to lean on equity investors in order to keep a lid on leverage.
Several acquisition announcements that strategically round out the activities of the acquiring parties, as well as mergers of smaller master limited partnerships (MLPs) looking to increase size and scale, have recently been announced. These include three modest-sized acquisitions by Sunoco Logistics Partners (SXL), Buckeye Partners (BPL) and Energy Transfer Partners (ETP). In aggregate, the assets acquired span most of the activities in the midstream sector, and Fitch viewed each as neutral to their credit profiles. We expect continued M&A activity in the near to intermediate term that focuses on similar opportunistic asset acquisition by larger midstream and MLP issuers and smaller issuers scaling up, particularly as large historical organic growth opportunities moderate.
In late September, SXL announced it would buy an integrated crude oil network in the Permian basin from Vitol for $760 million, which will provide a strong platform for SXL within the Permian basin. ETP announced this week it will pay $640 million for a stake in PennTex Midstream Partners, bolstering ETP's position in northern Louisiana. BPL will purchase a stake in international liquids terminals from Vitol for $1.15 billion, further expanding its significant terminals operations internationally.
All three of the acquiring companies have ample operational know-how with respect to the purchased assets. BPL has a significant terminals division, which, at year-end 2015, was measured at 118 million barrels of liquid petroleum product storage capacity. Ratable for its ownership percentage stake, the acquisition will bring the partnership another 22 million barrels of capacity (by ownership stake). SXL will acquire a system that begins at crude oil gathering pipelines and ends at a long-haul takeaway pipeline. This type of system is a foundational asset network for this MLP. The ETP purchase is a natural gas midstream network, which includes two processing plants. The midstream segment is ETP's largest.
All three of the above-mentioned acquisitions demonstrate the continuing resiliency of the equity capital markets amid low commodity prices. SXL's equity issuance raised gross proceeds of $567 million, before underwriter option, while Buckeye Partners raised $512 million. ETP stated that a portion of its cash payment portion will be funded with cash recently raised by its At-The-Market (ATM) program. In the second quarter, the ATM program and the Distribution Reinvestment program combined to raise $363 million.
The acquirers are also all members of the Alerian MLP index. There is activity among smaller companies as well. American Midstream Partners announced an agreement to acquire JP Energy Partners. The companies share ArcLight Capital Partners in their ownership structures. This announcement indicates that smaller companies may use the current relatively stable investment climate as a time to significantly grow in size.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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