The midstream business has propped up the energy industry’s involvement in capital markets in this year’s second quarter, all the while remaining popular with private equity groups in the quarter.
During that time, capital raised by the energy industry via public equity and debt issues was $16.9 billion—a 36% decrease year-over-year and a 23% decrease from this year’s first quarter, Drillinginfo said in a press statement July 17. Strength from the midstream and utilities segments prevented “a complete capital markets freefall,” the company said, noting the release of its second-quarter 2019 Capital Markets review detailing the slowdown in Wall Street funding of the energy industry.
“In a particularly poor showing, the upstream and oil field service sectors combined to raise only $300 million from fresh equity, and $2.5 billion from bond issuances,” said Drillinginfo analyst Andrew Dittmar.
Momentum for equity raises
“Wall Street emphatically closed the door on fresh external capital for upstream companies, especially from equity raises. That is consistent with calls for E&Ps to live within cash flow,” Dittmar said.
“The only continued momentum for capital raises came from midstream companies and integrated utilities, which combined to account for 95% of energy sector stock issuances and 85% of bond sales, including the spinout of Rattler by Diamondback. Unsurprisingly, midstream asset sales are also where E&P companies are looking to raise capital,” he added.
Midstream, too, remained popular with private equity groups in the quarter, the report showed. With nine commitments worth a reported total value of $6 billion, the midstream sector topped the upstream sector by three.
Looking at fundamental business conditions over the next 12-18 months, Moody’s Investors Service, in a July 1 investor note, pointed to momentum in the midstream sector and the increased role of private equity in it.
“We expect that private equity groups will remain the driving force behind consolidation and M&A activity among the smaller midstream companies, with deals likely to percolate during 2019-20. The trend is particularly visible in the highly competitive and fragmented Permian segment, where smaller gathering and processing companies, often backed by private equity, still struggle to keep pace with the growth in production,” Moody’s said. Demand for infrastructure supports consolidation for smaller midstream companies aiming to scale and capture more of the production growth, Moody’s said.
Small operators making deals
Moody’s anticipates “more ambitious deal-making among smaller operators” in 2019-20 in-line with deals like the Summer 2018 investment by Blackstone-backed BCP Raptor in KMI’s Permian Highway Pipeline natural gas project. The $2-billion PHP Project is expected to be in service in late 2020, assuming timely receipt of the requisite regulatory approvals. It is designed to transport as much as 2 bcfd of gas through 430 miles of 42-in. pipeline from the Waha, Tex., area to the US Gulf Coast and Mexico.
Moody’s also pointed to Ares Management-backed EPIC Y-Grade Services and its 2018 acquisition of a fractionation facility as part of its plan to complete NGLs pipeline and processing facilities to connect the Permian basin to the Gulf Coast.
At the same time, expect private-equity investors to help fund new growth projects, including with large midstream companies, the firm noted. Complex funding structures are being used by midstream companies to raise money at the subsidiary and joint venture level, backed by private equity co-investors “to limit the impact of private equity financing on the midstream sponsors’ consolidated metrics,” Moody’s said.
Targa Resources worked such a deal, selling 45% interest in Targa Badlands LLC, the entity that holds Targa’s assets in North Dakota, to funds managed by GSO Capital Partners and Blackstone Tactical Opportunities for $1.6 billion cash. The Badlands assets include 480 miles of oil gathering pipelines, 125,000 bbl of operational oil storage, 260 miles of gas gathering pipelines, and the Little Missouri gas processing plant. Badlands also owns a 50% interest in the Little Missouri 4 Plant.
The deal, closed in April, is “an example of a midstream holding company using private capital to help finance future development, in return for sharing future cash flow,” Moody’s said.