Many times we think the most important information to glean from quarterly conference calls relates to very specific details about a company's operations. However, in the topsy-turvy world of energy, conference calls increasingly provide details on business models and macroeconomic trends that make these group chats a can't-miss quarterly tradition.
The most recent call at Plains All American Pipeline (NYSE:PAA) is a perfect example, and today we'll look at what CEO Greg Armstrong had to say about midstream mergers and acquisitions, and the overall consolidation of the industry.
Year in review
February isn't the most obvious choice for a review of the year's activities, but here we are. The midstream industry has already hit us with announcements of potential master limited partnership spinoffs, and the news of at least one big merger.
In January, Phillips 66 (NYSE:PSX) reiterated its intent to spin off its midstream assets into an MLP. The company expects to file paperwork with the SEC next quarter and IPO sometime during the second half of this year.
Just last week, fellow Fool Matt DiLallo filled investors in on QEP's planned midstream spinoff, which is slated for an IPO in the second quarter of this year. QEP is an exploration and production company that is looking to unlock value by spinning off certain assets. It would be a regional play, focused on the Bakken at first, much like Marathon Petroleum's MLP spinoff, MPLX, that happened at the end of last year.
And then there's Kinder Morgan Energy Partners (UNKNOWN:KMP.DL), which is plunking down $5 billion to buy Copano Energy outright, in a unit-for-unit deal that is expected to close in the third quarter of this year.
That's a fair amount of news, given that we're only six weeks into the year. But what can we expect going forward? And how easy is it, exactly, to merge MLPs, as Kinder Morgan now seems to do on an annual basis?
One CEO's take
All the industry activity prompted an analyst to ask Armstrong to share his thoughts on the pace of industry consolidation. Here's what the Plains CEO had to say during the fourth-quarter call:
I think it's probably going to be pretty dynamic. That word gets used a lot around here, but I think ... we're up to 90-plus MLPs today. My understanding is that there [are] probably 10 to 15 more in the hopper. It would surprise me if the answer is that number just gradually goes up and doesn't contract at all with respect to some consolidation. ... And there's fundamental industrial logic as to why some of that consolidation should happen. It's easier to do when the markets aren't as robust as they are right now, because, quite candidly, people, you know capital is abundant and it's relatively cheap. And people would rather do their own MLP than they would consolidate.
It really is a great time to be a midstream MLP. Domestic energy production is at levels not seen in decades, interest rates are non-existent, and MLPs are routinely trouncing the returns of the major indices, increasing investor participation.
But what about economies of scale? Surely it makes sense to see just as many mergers as spinoffs. What Armstrong says next is also important to keep in mind:
But I will tell you structurally, MLP consolidation is challenging to do, and you have to really be committed to it, and you've got to know that the seller is committed to it, because if you have a two-tiered GP structure on both sides of it, that's a whole lot of legal fees and investment banking fees to get that deal done.
Obviously, we have seen many mergers in the industry over the past few years. They aren't impossible, and aside from Kinder Morgan, Enterprise Products Partners (NYSE:EPD) and Energy Transfer Partners (NYSE:ETP) have both been very active over the past 10 years. But these are established outfits; I would approach a brand-new MLP's attempt to acquire another brand-new MLP with more caution, should such a deal arise.
For now, though, it seems the market conditions are much more conducive to simply launching new MLPs, rather than buying existing ones.
Information like this is not really top secret, but many investors miss out on it because they never tune in to quarterly conference calls. Though many conference calls come at inconvenient times -- we have lives, after all -- the transcripts are almost always available online 24 hours later, and investors should make a point of checking them out. The Q&A at the end is especially valuable for gaining insight on the larger trends that affect our investments every day.