A consolidation frenzy in the midstream sector is seeing integrated majors snap up gathering and processing firms active in America's shale hinterlands, as the majors jostle with one another to source more y-grade (the raw mix of natural gas liquids) to feed into their expanding fractionation and export operations.
The majors' control over sizeable hydrocarbon liquid storage capacity along the Gulf Coast and strategic waterborne export outlets are key differentiators that, in effect, are allowing the big hitters to become even bigger.
Deals of this nature have featured every member of the 'Big Five' in Gulf Coast NGLs — Energy Transfer, Enterprise Products Partners, ONEOK, Phillips 66 and Targa Resources.
A maturing shale patch and consolidation in a fragmented upstream sector are driving the midstream mergers. The Permian and Haynesville Basins are now the only U.S. shale regions experiencing gas production growth. Of these, Haynesville is dry and so not an NGL play. Drilling decisions are now taken more carefully and selectively, and returning cash to shareholders is in favor.
"The 'drill, baby, drill' days are over," said Peter Fasullo, principal of Houston-based advisory firm En*Vantage. "The profusion of gathering and processing firms that mushroomed in the 2010s is being streamlined, and private equity which bankrolled that boom is now in exit mode.
"For most shale plays, the tidal surge that lifted all boats prior to the pandemic has moderated. But in midstream, integrated players remain under pressure to feed their NGL value chains. Organic growth is limited only to the Permian, so the other option is to buy out rivals or complementary upstream assets in any of the major shale basins."
The business template is similar across most midstream deals. The firms that are being acquired are more oriented towards the upstream part of the value chain and have limited or no integration with the "market," proxied by product distribution lines, NGL storage, fractionators (the plants that separate y-grade into commercially usable NGLs) and export docks. Private equity firms are likely to be among the investors.
The acquiring parties, on the other hand, have continued to add storage, fractionators and export capacity, so must find additions upstream to justify
Dallas-based Energy Transfer was the latest to announce such a deal, a $7.1 billion takeover of Houston-based Crestwood Equity Partners, in August 2023. The deal, if consummated, would give Energy Transfer control over Crestwood's upstream assets in the Williston Basin in North Dakota and the Powder River Basin in Montana and Wyoming.
The deal follows on the closing in December 2021 of Energy Transfer's $7.2 billion acquisition of Enable Midstream, and a $1.45 billion deal in May 2023 involving Lotus Midstream.
Energy Transfer operates what collectively amounts to the biggest waterborne NGL export network in the United States, featuring docks in Nederland, Texas, and Marcus Hook, Pennsylvania. The firm plans expansions at both locations. Energy Transfer also has a significant fractionation presence in Mont Belvieu, to which it has recently added.
"I suspect the real value [to Energy Transfer] is the bolt-on of Delaware Basin/Permian assets," said Keith Barnett, with Houston consultancy Energy Strategies International (EnSI) about the Crestwood transaction.
Enterprise Products Partners, which has the biggest NGL footprint in Mont Belvieu, has recently added a fractionator and unveiled plans for a new ethane and propane export complex in Beaumont, Texas, to complement its existing docks on the Houston Ship Channel. Enterprise in early 2022 featured in a similar transaction higher up the value chain, the $3.25 billion acquisition of Navitas Midstream Partners, the privately held gatherer in the Midland Basin of the Permian. Enterprise said the deal complemented its own presence in the Permian's Delaware Basin.
Targa Resources, another Mont Belvieu mainstay and operator of the Galena Park NGL export terminal on the Houston Ship Channel, in January 2023 paid $1.05 billion to buy out private equity firm Blackstone Energy Partners' 25% interest in the Grand Prix pipeline, an important conduit that feeds NGLs into Targa's Mont Belvieu fractionation complex. Targa also has pending fractionator additions and export upgrades.
Phillips 66 in June 2023 completed a $3.8 billion transaction that increased its stake in Denver, Colorado-headquartered gatherer DCP Midstream to a controlling 86.8%. The transaction gives Phillips 66 access to DCP Midstream's NGL volumes in the Permian Basin, the Denver-Julesburg Basin, the Midcontinent, East Texas, the Gulf Coast, South Texas and Central Texas.
Canadian pipeline company Enbridge and Phillips 66 shared ownership of DCP Midstream before this buyout. Enbridge's focus on NGLs was heard to be lukewarm, prompting Fasullo to describe DCP Midstream as "a child in a divorce."
"But the parents appear to have sat down together and finally worked out whose custody is in the best interests of the child," Fasullo stated.
Thanks to this, DCP Midstream's NGL volumes would now flow into Phillips 66's extensive fractionation operations in Old Ocean, Texas, and onward to Phillips 66's export terminal in Freeport, Texas.
ONEOK's $14 billion acquisition of Magellan Midstream Partners, announced in May 2023 but not yet consummated, is the only deal in the recent spate that does not fit the template. ONEOK has no export docks, and Magellan's assets are refined products-heavy. Both firms have stressed they see a strategic fit, but Wall Street has been skeptical.
Both firms are headquartered in Tulsa, Oklahoma. Fasullo believes overhead savings could be sizeable because of this, but is hard-pressed to identify material synergies from either an NGL or refined products point of view.
Magellan also has an export presence on the refined product side. But both firms have their tasks cut out on explaining "why they are not two completely different midstream animals," Fasullo said.
Conceptually, though, experts agree all mergers follow an old script. "[The Energy Transfer-Crestwood] merger is just another in the long line that began in the early 1980s," said Petral Consulting's Dan Lippe.
Lippe said most midstream startups were founded with a pre-established exit strategy for the private equity partners who put up the capital: to be acquired, and for significant multiples. In many cases, the Big Five acquire them.
"Invest $250 million, borrow $500 million, sell to one of the Big Five for $1.5 billion. Equity partners take home $500-600 million. It's the old fairy tale of spinning straw into gold," Lippe said.