Musical-Chairs Dealmaking for Energy MLPs Wins Analysts' Praise

(Bloomberg) -- A flurry of mergers in the master-limited partnership (MLP) segment for pipeline companies rocked the energy sector on Thursday, drawing a sanguine response from Wall Street analysts that generally supported the new, more simplified structures.

The earlier proposed deals -- Williams Cos. for the remaining stake in Williams Partners LP and Enbridge Inc. for all outstanding securities in its units -- were prompted in part by U.S. regulators ruling in March that MLPs can no longer receive a credit for income taxes they don’t pay, which sent certain stocks on a downward spiral. Liquefied natural gas (LNG) terminal and pipeline operator Cheniere Energy Inc. also proposed a deal for the remaining stake in a company it already controls.

Amid investor calls for structure simplification, an analyst from Bernstein suggested on Wednesday that MLPs converting to C corporations may not add as much value as one would expect. Bank of America Merrill Lynch nodded to possible future deals that may result, as Energy Transfer Equity LP could be next to join the group with a purchase of Energy Transfer Partners LP.

Another pipeline company in the crossfire is Boardwalk Pipeline Partners LP, whose majority owner Loews Corp. recently said its comment about a buyout of the rest of the energy company was mandated by law and not an attempt to sink the share price ahead of a possible deal.

Musical-Chairs Dealmaking for Energy MLPs Wins Analysts' Praise

Goldman Sachs (Theodore Durbin)

Rates Williams Cos. buy

"We believe many investors were anticipating the corporate restructuring announcement given prior management commentary in a press release and the 1Q18 earnings call." Goldman sees Williams’s plan as a response to FERC’s income tax allowance ruling.

Stifel (Selman Akyol)

Doesn’t cover Williams Cos., rates Williams Partners buy

"The transaction is mostly in line with our expectations, although the premium of 6.4% came in light to our 10.0% estimate. In addition, we assumed WMB would increase distributions by 15% immediately after closing the deal to keep WPZ unitholders’ distribution whole. However, WMB is expected to maintain prior distribution growth guidance of 10%-15% in 2018 and initiated 2019 growth at a similar level. While this results in WPZ’s third distribution cut to unitholders, the pro forma WMB is now stronger with expected distribution coverage of 1.7x."

Tudor Pickering (Colton Bean)

Rates Enbridge hold, price target C$46

"Roll-up is expected to go a long way in addressing long-dated investor concerns regarding Enbridge structural complexity while seeking to mitigate risks related to FERC MLP tax allowance elimination"

Credit Suisse (Andrew Kuske)

Rates Enbridge outperform

"The market should view the roll-up of the affiliates as being a realistic action," citing four reasons including:

  • "Vexing issue of structural subordination will be eliminated"
  • "Changes in regulatory review (FERC) and tax policy helped impair the current structure of many MLPs which limits the utility to a parent"
  • "Current market values of the underlying stocks are challenged for traditional capital market access by affiliates"
  • "On a longer-term basis, ENB will have an opportunity to properly recast affiliates from a better starting position when the market conditions are warranted"

Capital One

Announcement from Cheniere, Enbridge, and Williams should "bode well for the midstream space as the companies streamline corporate structures, lower the cost of capital, and expand investment appeal to a broader range of investors."

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