The steady rebound of oil and natural gas prices in 2021 from their lows in April 2020 led to solid returns for master limited partnerships (“MLPs”) in the markets and increased merger and acquisition (“M&A”) activity. MLPs, however, continued to struggle to fulfill their “financing vehicle” purpose as the equity capital markets remained largely closed and the debt capital markets continued to present challenges. With oil and natural gas prices increasing in the first quarter of 2022, these difficulties may dissipate, allowing MLPs to become more active in the capital markets.

Capital Markets

In 2021, the Alerian MLP Index (the “AMZ”) generated its highest total return in the past 12 years (up 40%), and the fifth best annual return since the AMZ began trading. The AMZ outperformed the broader market, which saw gains for the S&P 500 Index of approximately 27%. The commodity price environment, along with flat interest rates, helped the AMZ achieve these returns.

However, as has been the case for the past several years, traditional equity capital markets activity for MLPs and midstream C-Corps remained modest, with only eight public equity transactions in 2021 raising a total of $1.9 billion (compared to two public equity transactions in 2020 raising a total of $1.2 billion).

Debt market activity for MLPs and midstream C-Corps was down year-over-year, with 29 deals in 2021 (compared to 43 in 2020) and gross proceeds decreasing to $29.2 billion in 2021 from $50.2 billion in 2020. The number of debt offerings skewed slightly toward the high-yield space as compared to the investment grade category (16 and 13, respectively). In 2021, high-yield offerings raised a total of $15.3 billion compared to $13.9 billion for investment grade offerings.

Mergers & Acquisitions

Merger and acquisition activity increased significantly during 2021. The MLP and midstream C-Corp sector saw a total of 44 transactions with a disclosed value of $53.8 billion in 2021, up from 32 transactions with a disclosed value of $19.5 billion during the prior year.

A wave of consolidation transactions occurred during 2021, including the $7.2 billion acquisition of Enable Midstream Partners LP by Energy Transfer LP and the $1.8 billion acquisition of Oasis Midstream Partners LP by Crestwood Equity Partners LP. Third-party public MLP mergers, as opposed to mergers with sponsors and affiliates, have not been common over the past several years, but these two deals could signal a coming trend in 2022.

As has been more common over the past several years, 2021 also saw BP PLC, Chevron Corporation and Phillips 66 roll up their respective midstream MLPs, BP Midstream Partners LP, Noble Midstream Partners LP and Phillips 66 Partners LP. Additionally, Martin Midstream Partners LP, Enviva Partners LP and KNOT Offshore Partners LP all eliminated their respective incentive distribution rights (“IDRs”). Take private transactions also occurred, highlighted by Stonepeak’s acquisition of all of the outstanding common units of Teekay LNG Partners LP for $6.2 billion and New Fortress Inc.’s acquisition of all of the outstanding common units of Golar LNG Partners LP.

In late 2021 and early 2022, each of Höegh LNG Partners LP and Shell Midstream Partners, L.P. received offers from their respective sponsors to engage in roll-up transactions.

2022 Outlook

With the rising prices of oil and natural gas combined with low interest rates, 2022 could be another solid year for MLPs and midstream companies.

High levels of inflation tend to make MLPs and midstream companies more attractive investments because high inflation generally causes investors to flock to real assets. Historically, the Alerian MLP Infrastructure index has outperformed the broader market during years with high inflation (with the exception of 2008). MLPs have even outperformed sectors with hard asset exposure during high inflationary periods. MLPs and midstream companies offer some protection from the effects of high inflation rates and may potentially benefit investors through what could become a period of sustained inflation. Bond yields generally rise during high inflation, which could offset some of the anticipated benefits. But so far, bond yields have remained relatively low compared to the rate of inflation.

We expect to see continued consolidation in MLPs and the midstream industry in 2022. We believe that additional sponsors will decide to buy-in their MLPs after concluding that there is no longer sufficient benefit to having the public vehicle as an alternative financing source. We also expect to see some of the remaining MLPs that are in the high splits (which retain traditional elements of the MLP structure), primarily those with smaller market capitalizations, eliminate their IDRs.

Visit 2021 – Traditional Energy Rebounds and Increased Energy Transition, for the complete list of individual, detailed articles associated with this publication.

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