In 2019 we saw significant interest in midstream markets from private equity firms. Investments by private equity have been wide ranging across basins and midstream assets including pipelines, wastewater infrastructure, terminals, and gas processing plants. The rapid rise in production in the U.S. requires infrastructure which is why private equity firms have been giving premium valuations to what historically has received cheaper valuations. A list of select 2019 private equity transactions is shown in Figure 1.
For traditional midstream companies private equity should be viewed as both a partner and a competitor. Many public midstream companies are transitioning to more of a self-funding model which relies more on retained cash flow, joint ventures, and/or asset sales to fund growth, and private equity can act as a source of capital. Public companies will be able to monetize their assets at premium valuations. An example of this is Enbridge, which in 2018 sold 19 gas processing plants and 2,200 miles of natural gas pipelines to Brookfield Infrastructure Partners for $3.7 billion. Private exits will also provide greater inorganic growth opportunities for public companies. There are however some drawbacks to the influx of private capital into midstream markets. The lower cost of capital gives private equity firms a competitive advantage from a project return standpoint, forces more disciplined spending, and increases pressure on returns for public companies.
Commodities need to be moved, stored, processed, and exported, and midstream companies will be able to collect fees for the utilization of those assets. There are structural changes occurring in midstream markets which are highlighted by low commodity prices, regulatory changes, an influx of private capital, consolidation, and the shift from MLPs to C-Corps. Despite these changes, commodities still need to be moved, stored, processed, and exported, and midstream companies will be able to collect fees for the utilization of those assets. While capital flowing into upstream is declining, private investment into midstream has been increasing.
Most of the transportation services provided by midstream companies are fee-based, in which the operator gets paid a set fee based on volumes moving through the pipeline. Depressed oil and natural gas prices due to slumping demand will likely impact midstream operators as drillers within the U.S. may reduce spending, causing piped volumes to decline. Due to this uncertainty, it is unlikely that private equity interest in midstream increases and very unlikely that we will see a midstream IPO in 2020.
-Brandon Johnson and Uday Turaga
