Pipeline operator MPLX announced Monday that it had moved to acquire MarkWest Energy Partners for a cash and stock deal of around $15.63 billion. MPLX—owned by Marathon Petroleum—also bought out natural gas processor MarkWest’s $4.2 billion in debt in the merger.
This deal underscores two major considerations currently at the forefront of the oil and gas industry: Consolidation and the future of the master limited partnership (MLP) asset structure.
MLPs can hold tax advantages and are often popular with investors as they pay out dividends that they fuel through expansion and acquisitions. To wit, MLPs bring together the best of both worlds: The tax perks of limited partnerships and the ready money of a company that’s publicly traded. Yesterday’s mega-merger brings together two master limited partnerships to create one of the world’s largest MLPs, now worth around $21 billion dollars combined.
“The [MPLX-MarkWest] transaction signals the ascendancy of refining-linked MLPs, which are in the catbird seat in terms of valuation and strategic position vis-à-vis their very healthy corporate parents,” MLP expert and Managing Director at Robert W. Baird & Co. Ethan Bellamy told The Fuse in an email. “Refining margins are robust and likely to stay that way due to the oil glut. The halo effect of the corporate parents coupled with strong distribution growth from drop downs has created market-leading costs of equity for MPLX and its peers.”
Together, MPLX and MarkWest—the latter becoming a subsidiary of MPLX upon completion of the deal—will boast an impressive geographic footprint for gathering, processing and transporting gas. MPLX has a strong crude oil network in the Midwest and Gulf region. It is also currently constructing a pipeline in Ohio to transport oil from the Utica Shale where MarkWest already has plants. MarkWest also controls plants in the Marcellus shale in Pennsylvania and thousands of miles of natural gas pipelines. Furthermore, the merger marks a logical progression for Marathon, integrating its pipelines with MarkWest’s operations that generate fuels from natural gas.
While today’s deal creates the world’s fourth-largest MLP, it also raises questions about the future of the business model as industry consolidation seems to be in the cards—one way or another.
“We expect [industry consolidation] to continue for the next few years as the midstream opportunity set tails off and as the land rush of the past decade makes way for a focus on costs,” Bellamy said.
Indeed, consolidation in the oil and gas industry seems to be an increasingly viable option for shoring up operations against inherent uncertainties. However, other recent consolidation efforts have seen major industry players moving away from the MLP model and into a more traditional C-corporation structure. Just last year, industry giant Kinder Morgan abandoned the MLP structure that it had been instrumental in popularizing, having apparently found the model unsustainable with such massive growth.
A similar move to transition away from an MLP was attempted last month by Energy Transfer Equity’s (ETE) $53.1 billion bid to takeover pipeline company Williams. Ultimately, Williams rejected the unsolicited offer that would have transformed the newly-combined entity into a C-corporation.
But industry consolidation is not a one-size-fits-all solution. In this case, MPLX Chairman and CEO Gary R. Heminger is touting the implicit, long-term benefits of the MLP model.
“Out strategic combination with MarkWest would result in a large-cap, diversified MLP with an exceptional growth profile,” Heminger said in his statement on the deal. “This transaction creates a tremendous platform for the combined partnership to continue to grow distributable cash flow and creates significant long-term value for the unit-holders.”
Bellamy explained that MarkWest had long been eyed by investors as a “takeout candidate” but that he had expected Kinder—and not Marathon or MPLX—to ultimately be the buyer, citing “operational and strategic synergies” as well as few potential red flags for FTC overlap patrol.
“This is full price so [MarkWest shareholders] should be pleased at this level,” Bellamy added.
MarkWest’s chairman, president and CEO Frank Semple’s statement on the merger reflects a positive outcome to the industry’s latest consolidation effort: “This powerful combination provides MarkWest with an investment grade balance sheet and a significant expansion of growth projects driven by MPC’s significant pipeline and refinery operations in the upper Midwest and the Gulf Coast. Our best-in-class midstream platform will provide the combined company with an extraordinary portfolio of integrated services and long-term growth opportunities.”