On Tuesday, I had the opportunity to speak with Jerry Swank, founder of Swank Capital, the creators of the Cushing MLP indices and funds. This article is a summary of several noteworthy points made during our conversation on the multiple recent M&A events occurring within the MLP business.
Mr. Swank stated that the American midstream business is becoming dominated by publicly traded MLPs, which are starting to buy C-corporations. He believes that MLPs will win out over time. He also stated that the last five years of MLP growth were primarily predicated on natural gas infrastructure development, but that he believes the next few years will likely involve a growing amount of crude business.
Mr. Swank believes that the Energy Transfer Equity LP (ETE) takeover of Southern Union (SUG) was one validation of that, where the various SUG units will be divided among ETE MLPs. Energy Transfer Equity also owns the general partner of Energy Transfer Partners LP (ETP) and Regency Energy Partners LP (RGP). Mr. Swank also noted that ETP agreed to sell its propane operations to AmeriGas Partners LP (APU), a deal that would allow it to pay for the pipeline from the SUG deal and/or other sources.
He also noted that Richard Kinder of Kinder Morgan appears to agree with the MLP model. Kinder Morgan (KMI) announced plans to acquire El Paso Corporation (EP). In May, El Paso announced its own plans to split itself into two companies: a pipeline company and an exploration and production company. Kinder Morgan has also stated it plans to sell El Paso’s exploration and production division.
Mr. Swank stated that El Paso's MLP, El Paso Pipeline Partners (EPB) is a well constructed pipeline business with no real commodity exposure, but that the Kinder Morgan acquisition of EP does reduce growth expectations for EPB, and that the MLP's price suffered an immediate fall due to those recalculations. Kinder Morgan is also the general partner of Kinder Morgan Energy Partners (KMP).
Mr. Swank also noted that another large offer was recently made, but the SemGroup Corporation (SEMG) board argues that the Plains All American Pipeline (PAA) bid to acquire it for $24 per share in cash undervalues its assets. The market appears to agree, as SEMG is now trading well above this offer price. In other activity, Enterprise Products Partners (EPD) also also recently sold its Mississippi natural gas storage facilities to Boardwalk (BWP).
Mr. Swank also commented that beyond the MLP model continuing to win out C-corp assets, net inflows to their open end fund indicate that more retail investors are adding the asset class. Further, Mr. Swank stated he expects institutions to start supplementing their income oriented portfolios with MLPs, which now broadly provide superior yield to high quality corporate bonds.