The 2023 MEIC Conference
Last week the Midstream Energy Infrastructure Conference (MEIC) held its annual event in Palm Beach, FL. SL Advisors partner Henry Hoffman was there and today’s blog post recounts highlights reported by Henry.
Oneok’s (OKE) proposed acquisition of Magellan Midstream (MMP) was a common topic, especially the unwelcome recapture of deferred taxes facing MMP. When a c-corp, in this case OKE, buys a partnership (MMP), the limited partners in the target get a bad tax outcome.
For this reason, Crestwood, LP CEO Bob Phillips told us they’d never sell to a c-corp buyer. Since he’s never sold a unit of CEQP, his recapture of deferred taxes would presumably be significant. Williams CEO Alan Armstrong recalled paying a hefty tax bill on his own holdings of Williams Partners, LP when it was acquired by the parent company in 2018. There are few painless exits from an MLP investment.
One sell-side analyst reported that MMP had decided to sell because they didn’t see an obvious path to growth short of significant capex, and believed their company was undervalued. Overall companies expressed predictable interest in making bolt-on acquisitions but there was little indication of any other large deals in the works.
Gabe Moreen of Mizuho Securities, Adam Breit, from Truist and Chase Mulvehill from Bank of America generally agreed that strong balance sheets would allow further industry consolidation but were skeptical about any other large deals like OKE-MMP.
Natural gas takeaway infrastructure and permitting reform were two themes that recurred in discussions. Lunch speaker Dan Reicher, former Assistant Secretary for Energy (1997-2001), brought attention to the issue of consistent underinvestment in public infrastructure, particularly in areas that don’t provide immediate private returns. He underlined the criticality of bipartisan dialogue and collaboration in addressing the complex challenges of the energy sector.
A panel discussion covered potential opportunities for private equity deals, the escalating need for gas takeaway capacity, and the evolution of energy project permitting in the light of increasing social justice focus. J.P. Morgan’s financing panel predicted a challenging environment for upstream financing but expressed optimism for the LNG debt sector noting that financing has continued unabated.
Another lunch speaker, Dr. Amrita Sen from Energy Aspects, highlighted the robust Asian demand for Liquified Natural Gas (LNG) and the global increase in Natural Gas Liquids (NGL) demand. She noted the persistent underinvestment in the supply of both LNG and NGLs.
Highlights from interactions with individual companies are below:
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In a fireside chat, Enterprise Products Partners (EPD) Co-CEO, Randy Fowler, shared his perspectives on acquisitions. Fowler emphasized the importance of quality in three main areas: contracts; the producers underpinning those contracts; and the quality of systems in which these contracts operate. Specifically, he cited the Navitas acquisition as an example. Fowler also reflected on the company’s response to the COVID-19 pandemic. He noted that most staff returned to office work within 2-3 weeks, with the exception of immunocompromised individuals. He made it clear that remote work was not an option for their field workers and office workers should share the same ethos.
In a separate panel discussion on the topic of ESG, Fowler pointed out that with 30% of the world’s population living in energy poverty, EPD’s export of propane is making a tangible difference in people’s lives. He noted that EPD exports more propane than Saudi Arabia, a statistic that underscores the scale of their operations. He highlighted the fact that more people die annually from unsafe cooking practices than did from COVID-19 during the peak of the pandemic, emphasizing the vital role of liquefied petroleum gas in addressing this issue. He described LPGs from shale as a ‘true miracle.’
EPD also reiterated their commitment to the Master Limited Partnership structure.
Energy Transfer’s (ET) CFO, Dylan Bramhall, provided an update on the regulatory challenges the company is facing. He expressed shock at the Department of Energy’s denial of a permit extension for the Lake Charles LNG project. ET is appealing the decision, the results of which are expected within a month. Bramhall cautioned that this development may signal a shift towards more regulatory activism, potentially introducing a new layer of uncertainty and complexity in securing project financing.
Bramhall revealed plans to share financing responsibilities for Lake Charles with the individual equity partners rather than at the project level, with ET retaining a long-term 25% stake in the project. He highlighted the financial flexibility of the company and pointed out potential upstream synergies of Lake Charles. Bramhall also shared an ambition for more mergers and acquisitions, ideally financed through cash reserves expected to accumulate after a predicted upgrade to their credit rating later this year.
Jesse Arenivas, CEO of Enlink, concentrated our group session on the company’s Carbon Capture and Sequestration (CCS) initiatives. He projected that this business would represent 25% of the company’s EBITDA by 2030. Arenivas conceded that weather conditions had negatively impacted the company’s Q1 performance but remained optimistic about Enlink’s future prospects. He suggested that the company’s current market undervaluation makes acquisitions unattractive, effectively eliminating any M&A concerns.
Breck Bash with CapturePoint, a Texas energy distribution company, also reported seeing huge opportunities in CCS especially after the passage of the Inflation Reduction Act which includes substantial tax credits.
Alan Armstrong, CEO of Williams Companies, stressed that strong demand for the company’s services is challenging their capacity to deliver. With a long list of promising organic projects in the pipeline, Armstrong suggested that the company is not presently interested in pursuing M&A strategies. He drew attention to the Supreme Court hearing on the Chevron Deference case, indicating that its outcome could have considerable implications for the permitting process in the energy sector.
Nearly 40 years ago, in Chevron v. Natural Resources Defense Council, the US Supreme Court ruled that courts should defer to a federal agency’s interpretation of an ambiguous statute as long as that interpretation is reasonable. The Supreme Court has agreed to reconsider that ruling.
In a highly engaging conversation, Targa’s CEO, Matthew Meloy detailed his strategic approach to capital allocation. He highlighted his willingness to buy back his stock at a 7X EV/EBITDA multiple while identifying low-risk investment opportunities in contracted projects at a 4X multiple. Meloy offered insights into the potential sale of non-core assets in South Texas and the Badlands, which require minimal capex and yield stable cash flows. Meloy’s ten-year NPV approach to Targa and its assets displayed a keen sense of value. While he currently sees numerous opportunities, he acknowledged a potential surplus of free cash flow versus investment opportunities in the next 3-5 years. Consequently, Meloy expects a substantial increase in dividend payments in the future, although not near-term.
Lastly, Tellurian is optimistic about their prospects for securing equity partners by the end of July for their LNG project. They estimated that bank debt would be finalized within two months following the equity financing deal. Despite skepticism in the market, they argued that successfully securing equity financing would significantly boost their stock value. We have been critics of Tellurian, because of CEO Souki’s excessive compensation and a business model that until recently retained natural gas price risk in their LNG contracts which has made achieving financing more challenging.
Overall attendance at the 2023 MEIC was reported as similar to last year. One analyst was surprised it wasn’t greater given the frequent positive conversations he’s having with investors.
We found that it confirmed our bullish outlook, based on strong balance sheets, continuing capital discipline and continued global demand growth for US gas, NGLs and crude oil.
We have three funds that seek to profit from this environment: