Amid the ongoing volatility of equity prices, underlying midstream fundamentals continue to be healthy. Midstream throughput, as measured by the production of oil, natural gas, and natural gas liquids (NGLs), continues to increase. Midstream capital needs and balance sheets also continue to improve.
Despite this constructive fundamental backdrop, midstream equity prices, as measured by the Alerian MLP Index (AMZ), have recently retraced to levels close to the lows of 2016, when crude oil prices were near $40 per barrel and the trajectory of US production appeared less clear.
Unsurprisingly, private equity companies have seen the pricing dislocations between midstream asset and equity valuations and have been opportunistically acquiring midstream assets as well as entire companies at multiples above current public market multiples. In the latest instance, Blackstone Infrastructure Partners announced on Aug. 27 an offer to take Tallgrass Energy (NYSE: TGE) private, at an approximate 35.9% premium over TGE’s closing price on the date of the offer.
Private equity ramping up investment in midstream at higher valuations than where public MLPs are trading
Operating performance has been strong
Counterintuitively, the recent weakness in midstream equities followed healthy second-quarter earnings. For the quarter, 71% of sector participants reported results that were in-line or better than consensus and sector EBITDA was up over 17% from the same period last year. Further, many sector participants have continued to capture new growth opportunities, particularly related to the Permian basin and export demand.