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Midstream-focused Private Equity Firms ‘Open for Business’ Amid Oil Price Rout

Source: S&P Global Market Intelligence, Allison Good, May 11, 2020

Collapsing commodity prices have not deterred some private equity firms from pumping more cash into the U.S. oil and gas pipeline sector, although some alternative asset managers are not looking for more exposure to the energy industry as a whole.

Demand destruction caused by the coronavirus pandemic is bringing U.S. drillers to their knees, forcing widespread well shut-ins and severe spending cuts as some companies even prepare to file for bankruptcy. That has trickled down to public midstream operators, who have slashed investor payouts and capital expenditures of their own, including project delays and cancellations.

Private firms like EnCap Flatrock Midstream, on the other hand, are not under so much pressure that they have to sit their cash on the sidelines, despite the historical disruption.

“This situation is unprecedented and unlike anything we’ve seen in our careers,” the firm’s managing partners said in an email. “That does not mean that commitments and portfolio company activities are at a standstill. We are open for business, actively recruiting new management teams and working on projects with existing portfolio companies.”

EnCap Flatrock portfolio company Moda Midstream LLC, for example, continues to build crude storage capacity at its terminals in Ingleside and Taft, Texas, and is moving forward with its $500 million commitment to recently formed Tatanka Midstream LLC, which will also construct new midstream infrastructure.

ArcLight Capital Partners LLC, too, is looking to put steel in the ground through Camelback Midstream Holdings LLC, according to an April 20 announcement. And midstream-focused Energy Spectrum Capital closed its eighth fund earlier in May. The $969-million fund has committed to four new portfolio companies and has a fifth in documentation.

M&A, meanwhile, is still on the table even though deal activity has slowed down significantly, according to Ryan Smith, a senior director of research at East Daley Capital Advisors Inc.

“There are a few firms out there that there are kind of bargain-hunting,” he said in an interview. “If you start to have a turnaround you might have some deals pop up.”

EnCap Flatrock is one of those firms.

“Some of the best deals in midstream have been made in difficult markets,” the managing partners said. “It’s a little early, but we are already starting to evaluate a range of options that may come out of this downturn. We also expect opportunities may come to us.”

In an April 29 report, East Daley noted there are 131 non-core midstream assets ripe for divestiture as “one midstream [company’s] non-core asset is another midstream [company’s] bolt-on opportunity.” Those potential deal candidates run across the sector’s value chain, from gathering pipelines to offshore infrastructure.

Oil price volatility, however, will likely push alternative asset managers to exercise more restraint when it comes to distressed pipeline assets. For The Blackstone Group Inc., KKR & Co. Inc. and Apollo Global Management Inc., energy accounts for less than 5% each of invested assets as those firms have “dialed back” exposure, JMP Securities LLC analyst Devin Ryan said.

“It doesn’t sound like an area they’ve been looking to lean into,” he said in an interview.

Blackstone during its April 23 first-quarter earnings conference call said energy was the “largest detractor” across its portfolio during that period.

Still, Blackstone in an April 29 SEC filing reported holding a 6.9% interest in pipeline giant Energy Transfer LP, which would be the second-largest stake in the company after Energy Transfer CEO Kelcy Warren’s stake.

“There will be situations where these firms can … potentially find outsized risk-reward opportunities,” JMP’s Ryan said about such transactions.