Photograph of Sean Gallup / Getty Images
Energy pipeline companies could enter a new wave of negotiations if the last takeover is an indicator.
(Symbol: TRGP) announced Tuesday the sale of a 45% stake in its North Dakota assets to private equity firms
(BX) and GSO Capital Partners, for $ 1.6 billion in cash. The agreement gives the company a stake in 480 miles of oil pipelines, 125,000 barrels of storage and 260 miles of pipelines in the North Dakota Badlands.
The Targa share reacted positively, gaining more than 6% in trading Tuesday, while the
S & P 500
was mostly flat. Targa shares were successful this year, with a return of 34%. It outperformed both the S & P 500 and the broader energy pipeline sector, which gained 16%, based on industry returns.
Alerian MLP Index,
a basket of limited partnerships, or MLPs. The index also reacted positively, recording a 1.7% rise in trading on Tuesday.
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This type of buyout is not unusual for pipeline companies and MLPs. But the multiple suggests that their assets could reach higher values in private transactions or mergers.
Blackstone and GSO pay close to 16 times the value of the company / Ebitda (earnings before interest, taxes, depreciation and amortization), according to Jay Hatfield, portfolio manager of
ETF (AMZA). This is above the historical range of private energy infrastructure contracts, which have always been at 12-15 times EV / Ebitda, he said.
The multiple is also above the 11-fold average EV / Ebitda for MLPs and pipeline companies, Hatfield said. And this implies a wide gap between the valuation of the public market of the industry and the multiples that the private equity firms seem ready to pay. "It's about the same sort of arbitration as it has ever been in non-dislocated markets," he said.
Blackstone is not the only value found in pipelines. As Barron's recently noted,
(KMI) co-founder Richard Kinder bought shares in the company, acquiring $ 12.9 million worth of shares in the open market from February 7 to 12, at an average price of $ 18.07.
Private infrastructure funds may be willing to pay higher multiples for several reasons, Hatfield said. On the one hand, they raised large amounts of capital. They tend to hold long-term shares. And they have lower "rates of return", which means they are willing to pay for assets as long as cash flow and returns meet their long-term performance criteria.
So which other pipeline companies can be on the auction list? The big names in the industry are unlikely to be eliminated or merged, in part because of their heavy governance and capital structure for potential buyers. But companies may be more inclined to sell assets, especially since they see such a positive reaction in Targa shares.
In addition, multiples for MLPs and publicly traded companies may move closer to private market valuations. Many MLPs and pipeline companies have focused on restructuring in 2018, said Hatfield. Many have simplified their business structures and eliminated "incentive distribution rights" or payments to parent companies. The elimination of IDRs is often reflected by indirect dividend reduction for existing shareholders. But this should be the year that MLPs focus on increasing their distributions.
"I predicted much more of these private deals," Hatfield said. Even with no more catches, he added, "2019 should be a good year for MLPs".
Write to Daren Fonda at [email protected]