Units of CNX Midstream Partners (NYSE:CNXM) soared more than 29% by 10:15 a.m. EDT on Monday. Fueling the MLP's surge was a merger agreement with its parent, natural gas producer CNX Resources (NYSE:CNX).
CNX Resources has agreed to acquire all the units of its MLP that it doesn't currently own in an all-stock deal valued at about $357 million. CNX Resources would exchange 0.88 shares of its stock for each unit of CNX Midstream Partners that it doesn't already own. That ratio implies a 15% premium to the MLP's trading price over the past 30 days.
CNX Resources believes that the take-private transaction is the best solution, given the near- and long-term view of the MLP market. Investors have abandoned these vehicles due to underperformance and tax issues, which has weighed on valuations across the sector.
CNX Resources believes that by fully integrating its midstream assets, it will become the lowest-cost producer in the Appalachian Basin. It also sees the deal increasing its operational flexibility and free cash flow.
Many oil and gas producers created MLPs several years ago to operate their midstream infrastructure to support their growing production volumes. However, persistent volatility in the oil market and changes in the tax code caused investors to abandon these entities, which upended these growth plans. That's forcing producers to rethink their strategies.
While some have chosen to unload their midstream arms by selling or spinning them off, CNX Resources has decided to reacquire its affiliate. It believes that this option will create more value over the long term by keeping costs down. That could spark other similar deals as consolidation in the space continues.