A wave of merger activity has swept through the energy sector this year. The central driver of the dealmaking has been a conscious effort among energy companies to simplify their corporate structure by merging affiliated entities. One of the biggest was energy infrastructure giant Enbridge's (NYSE:ENB) megadeal to acquire all its publicly traded affiliates for roughly $10.4 billion. These deals will create one single entity with lower costs that will improve its financial profile and growth prospects.
The current wave of M&A activity has already accomplished much of the streamlining that the energy industry needed to do this year. However, a few complex situations remain, which means that there could be more deals coming down the pipeline. Here are three that might be the next ones announced.
The writing is on the wall
The one common theme among this year's simplification transactions has been that midstream general partnerships have been acquiring their master limited partnerships (MLPs) -- and vice versa -- to eliminate the costly incentive distribution rights (IDRs) that are eating into MLP cash flows. One midstream franchise that hasn't yet made this move is Western Gas Equity Partners (NYSE: WGP) and its MLP Western Gas Partners (NYSE:WES).
The companies have talked about completing a structural simplification transaction in the past. However, when asked on the second-quarter call for his current thoughts, CEO Benjamin Fink stated that "we have nothing new to say on the topic." That's because Western Gas' focus at the time was "on the second half ramp [of volumes due to recently completed expansion projects] and maximizing our performance," according to Fink. At some point, though, Western Gas will likely shift its focus and follow its peers by consolidating its two publicly traded entities into one simplified company.
They already took step one
Oil pipeline MLP Plains All American Pipeline (NYSE:PAA) and its general partner Plains GP Holdings (NYSE:PAGP), meanwhile, already took one step toward consolidating in 2016. In July of that year, Plains All American Pipeline issued 245.5 million of its common units -- worth $7.3 billion at the time -- to its general partner, as well as assuming $593 million of debt, in exchange for canceling the IDRs.
However, it's likely that the two companies will ultimately combine, considering that's what rivals have done. Enbridge, for example, bought out the IDRs of its MLPs before eventually agreeing to acquire those entities. Another reason why combining makes sense is that it would put Plains All American Pipeline on an even stronger financial footing so that it can continue expanding its oil pipeline business. The company is currently working hard to reduce debt so that it can improve its financial flexibility and more easily fund future expansions. It could accelerate that process by combining with Plains GP Holdings to form one stronger entity that should have better access to outside capital to fund projects.
It just makes so much sense
A similar transaction trend in recent years has been that energy companies have been combining affiliated MLPs to create one stronger entity. For example, when EQT Corp. (NYSE:EQT) bought Rice Energy to become the nation's leading natural gas producer, it also picked up a stake in Rice Midstream Partners. The company subsequently merged that MLP with its MLP EQT Midstream to create one stronger midstream company.
This trend could drive Marathon Petroleum (NYSE:MPC) to take a similar path. The company recently acquired a rival refiner, which gave it a stake in MLP Andeavor Logistics (NYSE:ANDX). Since Marathon Petroleum already owns an interest in MLP MPLX (NYSE:MPLX), it would make sense to combine them into one stronger entity, with MPLX likely buying out Andeavor Logistics.
It will be a shock if these deals don't happen
Investors have demanded change in the energy sector after years of underperformance, which has come in the form of a merger wave this year. That trend appears poised to continue since several companies have yet to consolidate. If they don't, these companies risk falling behind their peers that have created simpler and stronger companies that are better able to navigate the ups and downs of the energy market.