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Master Limited Partnerships and Midstream C-Corps - 2022 Review

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MLPs and midstream companies were able to produce solid returns despite a challenging year in the markets. The equity and debt capital markets proved difficult for another consecutive year with modest value. M&A transaction activity increased slightly from 2021, but was overshadowed by an approximately 50% reduction in transaction value. The sector could continue operating as a market safe haven during what most experts think will be a volatile year in the broader market, largely due to the expectation that MLPs and midstream companies will continue generating free cash flow.

Capital Markets

In 2022, the Alerian MLP Index (AMZ) generated a solid return amidst an unsteady year in the market (30.9% total return). Similarly, the Alerian Midstream Energy Index (AMNA) and Alerian MLP Infrastructure Index (AMZI) posted total returns of 21.5% and 31.4% for 2022, respectively. The AMZ, AMNA and AMZI greatly outperformed the broader market, highlighted by a loss of 18.1% on a total-return basis for the S&P 500. It was an impressive year for MLPs and midstream companies, in spite of increased interest rates and high inflation experienced throughout the year, and one of the only bright sectors in 2022.

While this performance was encouraging, it did not translate into burgeoning capital market activity. Traditional equity capital market transaction deal flow dropped to just six public equity transactions, as compared to eight in 2021. Equity capital market deal value results were mixed, with MLPs seeing a decrease of $871 million year-over-year and C-Corp midstream companies seeing an increase of $1.9 billion in 2022, with overall deal value increasing to a total of $3.0 billion (as compared to a total of $1.9 billion in 2021).

Debt market activity for both MLPs and midstream C-Corps was down from 2021, with the number of deals down slightly to 28 (compared to 29 in 2021) and gross proceeds decreasing by just over $12 billion, from $28.9 billion in 2021 to $16.8 billion in 2022. Investment grade debt offerings comprised most of the debt activity in 2022, with 22 offerings, compared to only six high-yield offerings.

Mergers & Acquisitions

Merger and acquisitions activity increased slightly in the number of transactions but overall deal value decreased substantially, falling by approximately 50%. The MLP and midstream C-Corp sector saw a total of 50 transactions for a disclosed value of $26.3 billion in 2022, compared to 44 transactions for a disclosed value of $53.8 billion during the prior year.

As has been common over the past several years years, 2022 saw several roll up transactions, including the roll ups of the remaining major-backed MLPs. An affiliate of Shell plc acquired all of the common units of Shell Midstream Partners, L.P. not already owned by Shell for approximately $2 billion in cash. Further, BP p.l.c. completed a merger with BP Midstream Partners LP in exchange for American depositary shares of BP in a deal valued at approximately $800 million.

Several significant non-roll up M&A transactions occurred in the MLP and midstream sector to close out 2022. The Williams Companies, Inc. agreed to acquire MountainWest Pipelines Holding Company from Southwest Gas Holdings Inc. for $1.5 billion, Stonepeak Partners LP agreed to acquire a 50% interest in the Key Access Pipeline System from Pembina Pipeline Corporation for approximately $485 million, and Tallgrass Energy agreed to acquire Ruby Pipeline from Kinder Morgan Inc. and Pembina Pipeline Corporation for $283 million. Additionally, Crestwood Equity Partners LP acquired Sendero Midstream and bought out First Reserve’s joint venture interest in Crestwood Permian Basin Holdings LLC for a total of $920 million.

2023 Outlook

Despite the generally negative outlook towards the market in 2023, MLPs and midstream companies have the potential to produce solid returns for another consecutive year. Companies are largely expected to continue generating free cash flow. MLPs and midstream companies will continue to increase distributions and undertake equity buybacks as important tools for returning capital to investors. The Alerian MLP Infrastructure Index historically outperforms the broader market during years with high inflation. Consolidations and equity repurchases are likely to continue in 2023 as they provide a useful opportunity if the markets show weakness.

A few important notes for early 2023 is that TXO Energy Partners, L.P. completed an initial public offering and raised $115 million. This was the first MLP IPO taxed as a partnership since 2017 and could provide a spark for additional MLP equity financings for 2023. Additionally, MLPs completed a number of high-yield debt offerings to kick off the year in January and February, including offerings by Crestwood Midstream Partners LP, Genesis Energy, L.P. and Martin Midstream Partners L.P.

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