Summary
- Consolidation has been a multiyear trend in energy infrastructure. U.S. C-Corps accounted for the largest portion of the midstream market cap for the first time at the end of 2023, unseating MLPs.
- Most midstream mergers were between related parties initially, but there have been more examples of third-party M&A in recent years.
- Midstream investors that are primarily interested in income will probably prefer MLP-focused funds. RIC-compliant funds, which own up to 25% MLPs, will appeal to midstream investors desiring diversification, broad representation, and total return.
Consolidation has been a key theme in the energy sector in recent years. But it has been a notable trend in energy infrastructure for much of the last decade. This note discusses how consolidation has changed the North American midstream universe and the implications for investors.
The North American midstream landscape has changed significantly over the last decade.
Consolidation has been a multiyear trend in energy infrastructure. The number of North American midstream companies have steadily declined since 2015. The chart below plots the number of companies in the midstream universe and the total market capitalization delineated by company type. Up until last year, MLPs had consistently accounted for the greatest portion of the midstream market cap even as their share gradually declined. As of year-end 2023, U.S. C-Corps represented the largest share — 39% of the universe market cap, compared to 35% for MLPs.
Interestingly, even with fewer companies, the combined market cap of ~$560 billion at the end of 2023 was higher than the market cap at the end of 2018. Note that the chart includes a few small-cap midstream names not in the broad Alerian Midstream Energy Index (AMNA). The chart excludes MLPs and corporations focused on compression, marketing, and distribution.
Interrelated transactions and third-party M&A drive consolidation.
Initially, most midstream consolidation involved related parties. But the nature of transactions has changed over time, with more examples of third-party M&A in recent years. Prior to 2018, it was common to have a publicly traded general partner structured as a corporation or MLP and a related MLP trading under a separate ticker. The first waves of consolidation mostly involved related companies simplifying their structure and streamlining into one ticker. This phenomenon began with Kinder Morgan’s (KMI) roll-up of three entities in 2014. But it reached a fever pitch in 2018 and 2019, with around 20 companies acquired during those two years (read more). Some companies were also taken private.
M&A activity slowed during the pandemic as companies focused on navigating a challenging macro backdrop. Deals picked up in 2022 and 2023, with a few of the independent refiners buying in their MLPs and with BP (BP) and Shell (SHEL) buying in their MLPs as well. In 2023, transactions between unrelated parties became more notable. This included ONEOK’s (OKE) acquisition of MLP Magellan Midstream Partners and Energy Transfer’s (ET) acquisition of Crestwood Equity Partners.
This year has already seen a combination of third-party deals and interfamily consolidation. Notably, Sunoco (SUN) completed its acquisition of fellow MLP NuStar Energy in May. Natural gas producer EQT Corporation (EQT) is acquiring midstream C-Corp Equitrans (ETRN), which just began operations for Mountain Valley Pipeline. The deal is expected to close in 4Q24. In terms of parent consolidations, Green Plains Inc. (GPRE) completed its acquisition of MLP Green Plains Partners in January. Martin Midstream Partners (MMLP) received a buyout offer from its parent last month. Later this year, a new midstream company will be added to the universe through the spin-off of TC Energy’s (TRP CN) liquids pipeline business into South Bow.
What does this mean for investors?
The universe of midstream names has evolved over the years. So, what are the implications for investors and how do they allocate to midstream going forward? Investors that own individual names have a smaller pool of choices. They may have been frustrated by past transactions due to tax impacts or valuations. For investors that access midstream through investment products, there may be little impact. It depends on the primary goal of their midstream position.
Keep in mind that any mutual fund, ETF, or closed-end fund with more than 25% MLPs will be taxed as a corporation (read more). Because of how funds are taxed, the choice between investment products has generally been delineated by an income focus with mostly MLP exposure or total return with more C-Corp exposure (read more).
In a recent webcast, we asked participants how they were primarily using MLPs/midstream in portfolios. Income was by far the leading answer at 44% based on 112 responses. Typically, investors looking to maximize after-tax income will be most interested in investment products that focus on MLPs given their higher yields. RIC-compliant products that own midstream corporations and up to 25% MLPs also provide generous yields. But they tend to be more oriented toward total return (no tax drag on performance). For context, the 10-year average yield for the Alerian MLP Infrastructure Index (AMZI) is 8.0% compared to 6.2% for the Alerian Midstream Energy Select Index (AMEI), which consists of 25% MLPs and 75% U.S. and Canadian midstream C-Corps.
Investors that desire diversification and better representation of the universe (e.g., MLPs and C-Corps) will likely prefer a RIC-compliant investment vehicle. With C-Corps becoming more prominent, investors can find RIC-compliant products that purely focus on midstream. Utilities and other energy companies were historically used to round out portfolios.
Even though the midstream landscape has changed significantly over the last decade, the changes may only impact an investment decision if an investor is primarily concerned with broad exposure to the universe. Investors used to be able to achieve high yields and broad representation in an MLP-focused product when MLPs were ~60% of the market cap. For some time now, investors have had to choose between MLP exposure with higher income and broad exposure with a total-return orientation.
AMZI is the underlying index for the Alerian MLP ETF (AMLP) and the ETRACS Alerian MLP Infrastructure Index ETN Series B (MLPB). AMEI is the underlying index for the Alerian Energy Infrastructure ETF (ENFR) and the Alerian Energy Infrastructure Portfolio (ALEFX). AMNA is the underlying index for the ETRACS Alerian Midstream Energy Index ETN (AMNA).
Related Research:
Better Together: Energy Consolidation Continues
ETFs, CEFs & More: MLP Investment Products Evolve
Bye, Bye, Bye MLPs Revisited (December 2018)
Beyond the K-1: Tax Treatment for an MLP Fund
Vettafi.com is owned by VettaFi LLC (“VettaFi”). VettaFi is the index provider for AMLP, MLPB, ENFR, ALEFX, and AMNA for which it receives an index licensing fee. However, AMLP, MLPB, ENFR, ALEFX, and AMNA are not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of AMLP, MLPB, ENFR, ALEFX and AMNA.
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