According to a report by Bloomberg, MLPs are not daunted by the collapse in the price of oil. Instead, midstream companies including Enterprise Products Partners LP (EPD -0.31%), Energy Transfer Equity LP (ET 0.44%), and Williams Companies (WMB 0.31%) are bidding up Pioneer Natural Resources (PXD 0.63%) midstream assets in the Eagle Ford Shale. The winning bidder is expected to offer more than $3 billion for the asset, which is quite a pretty penny in light of the drop in oil prices.
A look at the merchandise
Pioneer Natural Resources owns 50.1% of its Eagle Ford Shale midstream business with Indian partner Reliance Holding USA owning the other half. As the following slide notes, the business was formed in 2010 to gather and handle condensate and natural gas produced from the Eagle Ford Shale.
Source: Pioneer Natural Resources Investor Presentation.
What's important to note here is that the assets primarily handle condensate, which is of growing importance now that it can easily be exported once it is stabilized. These particular midstream assets are key to that process, and are why Pioneer Natural Resources, with the help of Enterprise Products Partners, has been exporting minimally refined condensate produced from the Eagle Ford Shale. It's because these assets are important for exporting condensate that's likely the reason why so many MLPs are interested in this acquisition.
Paying a premium
If the rumors are true than the $3 billion bid price would represent quite a premium for these assets. When Pioneer Natural Resources first put these assets on the block last fall analysts assumed the assets would sell for 9 to 12 times cash flow, or upward of $2.4 billion. However, that assumption was made when oil prices were much higher. The fact that the price of oil is now substantially lower should have muted the premium Pioneer Natural Resources and its partner received for the assets because lower oil means slower growth.
However, it would appear that midstream companies are looking past the current slump in oil prices and to a future where access to export markets will be at a premium. This is because producers can fetch a lot more money for their condensate outside the U.S. as its price in the U.S. is currently depressed due to oversupply. This premium pricing was noted by Pioneer Natural Resources CEO Scott Sheffield on the company's last quarterly conference call as he pointed out that Pioneer's processed condensate export volumes were enjoying "significant improved pricing" overseas. This premium pricing is behind the company's decision to increase its export volume from 25% of its condensate production in 2014 to 50% of its production in 2015 so that it can squeeze out a little more cash flow amid slumping oil prices.
Investor takeaway
For MLPs, having the platform to process condensate out of the Eagle Ford Shale could prove to be an important strategic advantage down the road. Oil producers will likely want to squeeze every dollar out of each barrel of petroleum that's produced and the best way to do that is to send condensate overseas where it's much more highly valued. This is why it appears that MLPs are ready to open up their checkbooks to acquire Pioneer's midstream assets at a premium even though the oil slump should have put a lid on asset prices.
