A spate of oil and gas pipeline deals has boosted mergers and acquisitions for the industry by nearly 30 percent this year, but soaring prices are turning off many potential buyers.
Demand has driven up valuations for the limited supply of properties for sale, and many pipelines have become too expensive for the tax-free master limited partnerships that now dominate the field, bankers say.
Recent deals - such as Plains All American Pipeline LLP's plan to buy Pacific Energy Partners LP, for about $2.6 billion in a deal combining two MLPs - are an exception rather then a harbinger of more deals to come, they say.
Five years ago, most growth came through acquisitions, but now MLPS are more interested in building than buying, said Rob Pierce, a managing director at Lehman Brothers.
Several MLPs have gotten larger and are better able to finance more organic development without sacrificing their ability to maintain and increase their distributions over time, Pierce said.
Master limited partnerships pay no corporate taxes and distribute nearly all of their profits to shareholders, including the corporations they were spun out from.
They have become more popular in recent years as energy companies have been moving their cash-rich pipelines into publicly traded MLPs.
For instance, Kinder Morgan Inc., whose managers are now trying to take the corporate entity private in a $13 billion deal, moved its pipeline assets to Kinder Morgan Energy Partners LP years ago.
More recently, Duke Energy and ConocoPhillips moved many natural gas liquid and natural gas assets into a joint venture DCP Midstream Partners LP that went public in December. Duke is also considering moving its natural gas pipeline assets into a separate MLP, it said last week.
Pipelines are sought after by MLPs because they have low operating costs and throw off large amounts of cash. And while they have benefited from an increase in demand for energy products, they have little of the risk associated with commodity price swings.
Global oil and gas deals, which includes pipeline-related acquisitions, rose nearly 30 percent to $111 billion during the first half of the year.
SCARCITY OF PIPELINES FOR SALE
But pipelines with for-sale signs on them are scarce because many are owned by companies that already have plans to sell whatever assets they have to their own MLPs, or by the major oil producers such as Exxon Mobil Corp. that believe the assets are strategic.
And those pipelines that have come onto the market are going through auction processes that push prices up.
Whenever quality assets are out there for sale, you see almost all of the MLPs in this space looking at them, said Bill Finnegan, a partner at Vinsons & Elkins, a law firm in Houston.
Given the stiff competition, companies are building new pipelines, often with their rivals. For instance, last month Oneok Partners - an MLP previously called Northern Border Partners - said it would work with Boardwalk Pipeline Partners and Energy Transfer on a pipeline that connects Texas, Oklahoma, Arkansas and Mississippi. And Kinder Morgan is one of three companies building a more than $4 billion pipeline across the Rockies.
In MLPs, the companies that have control of their own destinies by building their own pipeline extensions ... are the ones that are being valued higher and given higher valuations, said Paul Murdock, a director in the global utility and chemical banking group at Deutsche Bank.
Many of the MLP deals that have occurred involved financial sponsors who are trying to build up their investments in this area, and are willing to pay price-to-cash flow ratios as high as 14 times earnings before interest tax and depreciation, compared with eight times a couple of years ago.
Stand-alone MLPs that do not have a link to a corporation that can move more assets into it or that are in a business that is not growing quickly enough, have been willing to pay the higher prices.
For instance, MLP Crosstex Energy LP bought privately held Chief Holdings LLC, which included natural gas gathering systems, for about $480 million in a deal that closed last week. That comes on the back of Crosstex's purchase of midstream assets last year from El Paso Corp. for about $500 million.
Among other top 10 pipeline deals this year, MLP Northern Border Partners bought Oneok's pipeline, storage and processing assets for $3 billion and has since changed its name to Oneok Partners.