Oil prices are bouncing back this year, and some commodities market observers see West Texas Intermediate (WTI) working its way to $80 per barrel.
Those are among the reasons the Alerian Energy Infrastructure ETF (ENFR) is higher by nearly 31% year-to-date. However, high oil prices and resurgent natural gas aren’t stoking much in the way of mergers and acquisitions in the midstream, the energy segment ENFR focuses on. ENFR benchmarks to the Alerian Midstream Energy Select Index (CME: AMEI).
Of course, ENFR would likely be higher than 31% if midstream consolidation was running hot, but it’s not necessarily a bad thing that members of the Alerian Midstream Energy Select Index aren’t yet active on the M&A front.
“After a race to build long-haul pipelines and gathering and processing systems in recent years, the effects of both the coronavirus pandemic and a stricter regulatory administration have brought most new pipeline and terminal projects grinding to a halt in the last 18 months or so,” according to S&P Global Market Intelligence.
It’s not hard to find the silver lining in the lack of midstream energy consolidation this year. In bygone oil bull markets, pipeline operators were happy to merge, but markets exposed bloated balance sheets and duplicative operations when bear markets set in.
These midstream energy companies, including ENFR, prioritize balance sheet strength, improve free cash flow, and boost credit ratings over large-scale mergers and acquisitions. Energy Transfer (NYSE: ET), ENFR’s fourth-largest holding, is buying Enable Midstream in one of this year’s bigger midstream deals, while Pembina Pipeline (PPL), 5.11% of ENFR’s roster, was outbid for a Canadian asset. Other than those transactions, midstream M&A activity in 2021 consists mostly of bolt-on deals.
“Otherwise, only smaller deals have taken place, such as master-limited partnership rollups of TC PipeLines by TC Energy and Noble Midstream Partners by Chevron. BP is currently planning to fold up BP Midstream without even offering a premium, and analysts wondered if Shell will soon do the same with Shell Midstream,” notes S&P Global.
Shell Midstream Partners LP and BP Midstream Partners LP are smaller ENFR holdings.
There are benefits to ENFR investors in this slow M&A environment, including improving cash flow positions that can support distribution growth and upped share buyback plans, among other pluses.
“The focus remains strictly on free cash flow, debt reduction, non-core asset divestitures, share buybacks, and increased dividend or distribution payouts. And companies are trying to figure out whether they can afford to grow again without being punished by Wall Street, or whether they should just stick with buybacks and investor payment,” adds S&P.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.