There's a significant disconnect between the public market value of midstream assets and their private market value. That's evident in the huge premiums that private equity funds have offered to take these energy companies private.
Because of that and some other factors, an increasing number of midstream companies are considering a sale. Here's a look at some of the sector's recent deals as well as which companies might be the next ones to receive an offer they can't refuse.
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Drilling down into recent deals
This past May, Buckeye Partners (BPL +0.00%) agreed to be acquired by the IFM Global Infrastructure Fund for $41.50 in cash. The deal valued the MLP at $10.3 billion, implying a gaudy 27.5% premium. The offer came after a challenging period for the company. It had been under quite a bit of pressure due to turbulent market conditions, made worse by an acquisition that weakened its financial profile. Buckeye took several steps to correct the situation, including selling assets and reducing its distribution. However, public market investors didn't give it any credit for the improvements it made nor its promising growth prospects. That allowed private equity to swoop in and buy Buckeye so that it could be the sole beneficiary of the company's upside.
Tallgrass Energy (TGE +0.00%), meanwhile, received a big-time buyout offer from private equity giant Blackstone Group (BX +0.00%) in August. Blackstone had already acquired a 44% interest in the midstream company earlier this year. However, after watching the public market value of Tallgrass slide even though its growth prospects were becoming more promising, it decided to take full control. It's offering $19.50 for every share it didn't already own, which is a 36% premium.
Next in line?
According to media reports, a couple of other midstream companies are actively pursuing a sale. In April, Reuters reported that oil and gas producer Noble Energy (NBL +0.00%) put its MLP, Noble Midstream Partners (NBLX +0.00%), up for sale. By unloading its stake in the pipeline operator, Noble could focus on its core oil and gas operations. Further, it could potentially return some of the cash proceeds to investors via an expanded share repurchase program. Bloomberg then reported in August that Noble was in talks with several potential buyers, including natural gas pipeline giant Williams Companies and private equity fund Global Infrastructure Partners. What's interesting is that not only is private equity bidding but also a strategic buyer like Williams. That increases the potential the Noble Midstream could receive an attractive deal premium.
Bloomberg, meanwhile, reported in July that Occidental Petroleum (OXY 0.69%) was looking for a buyer for its MLP Western Midstream (WES +0.53%). The oil giant acquired a 55% stake in that entity when it bought Western's former parent Anadarko Petroleum. In this case, however, Occidental doesn't plan on selling its entire interest in Western Midstream. Instead, it wants to find a partner that will take Western Midstream private while allowing Occidental to continue holding a minority stake. That will enable the oil company to keep a financial and operational interest in the infrastructure that's crucial to supporting its operations. The company has already hired advisors to find a buyer. Potential bidders could include both private equity funds as well as large strategic buyers like ONEOK, Enterprise Products Partners, and Energy Transfer.
If either company agrees to sell itself for a premium, that could spur even more midstream companies to start exploring a sale.
An interesting trend to watch
We've already seen two transactions this year where midstream companies agreed to big-time premiums in take-private deals. Given recent media reports, at least two more are in the works. While that could enable investors to score a quick gain, they shouldn't buy these stocks in hopes of a buyout. That's because one might never materialize.
However, if more premium-priced mergers happen, it could help lift the value of the entire industry. That's why investors should keep an eye on these developments since it could help shake this sector out of its current doldrums.
