NEW YORK (The Deal) -- It's been all gloom and doom in the oil and gas industry given the drop in fuel prices. Stocks are down, layoffs are being announced, capital budgets are being cut, and more and more companies are becoming distressed (witness Hercules Offshore's hiring of Lazard to advise it on restructuring options). Some, like Dune Energy
, are just throwing in the towel and filing for bankruptcy.
Yet several oil and gas exploration and production companies have something in their back pockets that could generate cash in a sale or a spinoff: their infrastructure, or midstream, assets. And a lot more of them are looking at that option more seriously as a near-term solution to their problems.
Midstream assets are less affected by lower commodity prices, as they typically earn their money by charging fees to oil and gas companies that use them to transport, process and store their oil and gas via long-term contracts. But if oil prices stay low, there will be less drilling, meaning there won't be demand for midstream companies to build additional infrastructure -- hence, less growth for these vehicles, which distribute most of their earnings to shareholders and thus don't pay corporate income taxes.
Some companies have already spun or sold off their midstream entities, including Anadarko Petroleum
, Devon Energy
, Antero Resources
, Chesapeake Energy
and QEP Resources
, the latter encouraged to do so by hedge fund Jana Partners.
Rice Energy
was particularly bold. In December, just 10 months after its own initial public offering, and in the midst of a severe drop in oil prices, it took public its midstream master limited partnership, Rice Midstream Partners
. The offering raised only $413 million versus its hoped-for $600 million, and the stock hasn't exactly been going gangbusters. It priced at $16.50, the largest discount for an energy MLP in 2014, and it's currently down to around $13.80. But now Rice has a vehicle to drop its midstream assets into, which will bring in money to spend on its developments when cash may be scarce.
Even utilities are getting in on the act. Columbia Pipeline Partners
, created by NiSource
, raised $1.24 billion in an IPO in February, the largest such issue yet, surpassing Antero Midstream Partners LP (AM) at $1.15 billion.
More are coming. One is Hess's Hess Midstream Partners, which hopes to raise $250 million and will hold its parent's midstream assets in the Bakken Shale. GimmeCredit analyst Philip Adams wrote in a report in September that between the IPO and accompanying debt financing, plus additional drop-downs, the oil and gas company could extract $1 billion in cash this year.
Gabriele Sorbara, an analyst at Topeka Capital Markets, said Magnum Hunter
expects to take Eureka Hunter Midstream public later this year -- perhaps as soon as the second quarter. Pioneer Natural Resources
is marketing its Eagle Ford midstream assets, and Oasis Petroleum
could sell or MLP its infrastructure assets (Oasis Midstream Services).
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Some have been preempted: Coronado Midstream Partners planned to go public, but EnLink Midstream Partners
bought its parent, Coronado Midstream Holdings, last month from privately held Reliance Energy, Diamondback Energy
and RSP Permian
for $600 million.
Private-equity firms also see this maneuver as an exit possibility if they can't sell their oil and gas exploration and production assets at the price they want. NGP Energy Capital Management-backed PennTex Midstream Partners filed for an IPO in September, setting a nominal fundraising target of about $150 million. ArcLight Capital Partners-backed JP Energy Partners
already raised $267 million in October.
There are still some companies that haven't committed to making the big drop. One is Whiting Petroleum
, which the Wall Street Journal reported late last week has hired an investment bank to look at strategic alternatives, including a possible sale. It has a sizable midstream operation, including gathering and processing plants in the Williston and DJ basins, that would be prime for a master limited partnership. It could also simply be bought by a company like Anadarko, which could keep Whiting's onshore oil and gas properties and then drop its midstream assets into its already existing midstream vehicle.
"Selling assets in a bad market is never desirable but can make sense if doing so protects the balance sheet and asset base until market conditions improve," Tudor, Pickering, Holt & Co. Securities Inc. wrote in a Tuesday note. "Selling the entire company, on the other hand, is another matter. If it is true, the timing is surprising given where we are in the cycle."
Southwestern Energy
has a midstream entity, but the company doesn't plan to spin it off, said one analyst who spoke with the company recently but asked not to be identified.
While Royal Dutch Shell spun out Shell Midstream Partners last fall, raising $920 million, Chevron has gone the sale route. It September it shed its Gulf Coast natural gas pipeline assets, including the Bridgeline system in Southern Louisiana, to EnLink Midstream Partners and EnLink Midstream LLC for $235 million and its Chevron Petrochemical Pipeline unit, which owns the Evangeline ethylene pipeline system, to Boardwalk Pipeline Partners
for $295 million in cash.
Many companies that have already launched publicly traded MLPs still have more midstream assets they could drop down, which would bring capital into their coffers for debt repayment and/or capital expenditures but would also boost their midstream partnership by boosting growth. That's something the entire industry could use in these down days.
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