May 1, 2020 – A long list of noncore midstream assets ripe for divestiture could help some North American pipeline firms preserve investor payouts as collapsing oil prices and the COVID-19 pandemic threaten cash flow, according to a new report from East Daley Capital Advisors Inc.
There are 131 such targets across the sector’s value chain, from gathering pipelines to offshore infrastructure, that are potential deal candidates, the report said.
“One midstream [company’s] non-core asset is another midstream [company’s] bolt-on opportunity,” the research firm said in the April 29 report. “For some companies looking to salvage distributions, a strategy of ‘trimming the fat’ by divesting non-core assets and redeploying capital towards core competencies could set them up for long-term success and financial strength.”
Several pipeline firms have been forced to slash distributions in anticipation of oil and gas producer shut-ins, and some may need to cut more if crude prices do not rise. Even for those companies whose distributions are safe for now, however, pressure to pay down debt by selling assets had already been mounting for months before the downturn.
February saw several midstream asset-level M&A transaction announcements, but that deal pipeline slowed to a trickle in March and April as gathering and processing infrastructure became less attractive because of exposure to oil prices. But while major public companies are dialing back on growth spending, East Daley said that “private equity firms … may find opportunities to expand their portfolios with projects that might not otherwise be on display.”
In terms of potential sellers, according to the report’s list, Enbridge Inc. and MPLX LP have the most noncore assets to put up for sale, including the Canadian pipeline giant’s 50% stake in DCP Midstream LP’s general partner. MPLX, meanwhile, could unload infrastructure in places like Oklahoma and Wyoming to shore up its Northeast gathering and processing footprint.
East Daley also named Kinder Morgan Inc.’s CO2 business an opportune divestment. The company posted a net loss for the first quarter “primarily due to … noncash impairments of assets and goodwill associated with certain oil and gas producing assets in [Kinder Morgan’s] CO2 segment driven by the recent sharp decline in crude oil prices.”