A wave of mergers and acquisitions (M&A) has swept the oil fields in the past year. Major oil giant ExxonMobil kicked off with his $60 billion deal for Pioneer Natural Resources. Several rivals followed suit, including Chevronwho tries to buy Hess in a transaction worth nearly $60 billion.
The merger and acquisition wave in the oil industry has spilled over into the pipeline sectorSeveral midstream companies have made acquisitions, while the rumor mill suggests others are lurking. These deals will give pipeline companies more fuel to grow their cash flow and high yield dividends.
Let’s make a deal
Energy transfer (NYSE: ET) is proud to be a consolidator in the midstream sector. Master Limited Partnership (MLP) has made several acquisitions over the years. However, it has picked up the pace over the past year. The company closed two deals last year (the $1.5 billion purchase of Lotus Midstream in May and the completion of a $7.1 billion merger with fellow MLP Crestwood Equity Partners in November).
The MLP has continued to close deals this year, buying WTG Midstream in July for $3.1 billion. In the meantimeher affiliated MLP Sunoco LP NuStar Energy for $7.3 billion and then formed a strategic joint venture to combine its crude oil and produced water-gathering assets in the Permian Basin (which it acquired in the NuStar deal) with Energy Transfer’s assets in the region.
These transactions share two common themes. They are strong strategic fits that bolster Energy Transfer’s existing assets. The deals were also accretive to cash flow per share and neutral to the balance sheet, reinforcing the MLP’s plan to grow its 8% yield distribution by 3%-5% annually.
One (NYSE: OKE) has been just as active. The pipeline company closed its transformative $18.8 billion acquisition of MLP Magellan Midstream Partners last year, a deal that increased its scale and diversification while also being highly accretive (free cash flow per share will average more than 20% through 2027). Oneok followed that deal with $5.9 billion in acquisitions last month.
It is acquiring Medallion Midstream and a 43% stake in EnLink Midstream from the same private equity firm. After closing that deal, Oneok plans to purchase the remaining stake in EnLink from outside shareholders. Those deals will be immediately accretive to cash flow and the capital return program, which includes increasing the dividend of over 4% by 3%-4% per year.
Business Product Partners (NYSE: EPD) has also been honestly active this year. It has recently been agreed buy Pinon Midstream in $950 million dealIn addition, it purchased $400 million in joint venture partner interests from another MLP Western Midstream Partners (NYSE: WES)These deals will give Enterprise Products Partners more fuel to increase its more than 7% yielding distribution, something it has been doing for 26 years in a row.
More deals could be coming pipeline
The midstream sector’s wave of consolidation shows no signs of stopping. According to a report from Bloomberg, the natural gas pipeline giant Williams had some interest in purchasing a midstream company Targa sources. There is something disagreement about the size of the interest. Targa reportedly said it rejected the bid because it undervalued the company. Meanwhile, Reuters reported that Williams never made an offer.
Anyway, Rumors suggest midstream companies are still looking for deals. Williams and Targa Resources have both been targets in the past. Energy Transfer had agreed to buy Williams in 2015, but that deal fell through, leading Enterprise Products Partners to approach Williams with a deal the following year. Prior to that, Energy Transfer had been interested in buying Targa.
Meanwhile, Western Midstream Partners’ largest investor, oil giant Occidental Petroleumexplored selling its stake in the MLP earlier this year. Occidental is selling non-core assets to pay down debt following its $12 billion acquisition of CrownRock. While it recently reduced its stake in Western Midstream to raise some cash for debt repaymentit could eventually sell its entire remaining stake to another midstream company or a private equity fund. The buyer could then offer to acquire the rest of the company from outside shareholders, similar to Oneok’s planned two-phase acquisition of EnLink.
In addition to deals between listed midstream players, private equity firms have taken advantage of the M&A boom by selling their midstream holdings. Lotus, WTG, Pinon and Medallion were all smaller midstream companies owned by private equity. Other financial investors will likely want to exit their positions while the deal window is still wide open.
Adding more fuel to pay dividends
Pipeline companies prefer to grow organically by expanding their midstream infrastructure businesses through expansion projects. However, many are turning to M&A to improve their growth profiles. These accretive deals increase their cash flow, which will strengthen their ability to increase their high-yielding dividends in the future. Therefore, income-oriented investors can capture higher returns from the sector in the future as companies make additional accretive deals. That makes it a great place to collect a growing stream of passive income. these days.
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Matt DiLallo has positions in Chevron, Energy Transfer and Enterprise Products Partners. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Enterprise Products Partners, Occidental Petroleum and Oneok. The Motley Fool has a disclosure policy.
These high-yielding dividend stocks are turning to acquisitions to boost their growth engines was originally published by The Motley Fool
