The Evolution of Midstream Asset Ownership: From MLPs to Private Equity and the Rise of Private Credit
The 2017 change in corporate tax rates from 35 to 21 percent had a direct effect on the ownership of midstream assets. The Master Limited Partnership (MLP) structure no longer had the same competitive advantage when it came down to minimizing taxable earnings. As a result, some assets that were once deemed core and strategic to some companies all of a sudden became less interesting to them. Hence, sale of these assets over the last decade was a phenomenon we witnessed with greater frequency. What was new and different was that many of the buyers of these assets came from the world of private equity – the players with the biggest stack of chips. Historically, PE firms have done a marvelous job of shepherding growing companies from puberty through adolescence. The PE wizards have utilized their experience, network and capital wherewithal to guide entrepreneurs into the roles of nascent CEOs as the companies they owned spread their wings.
However, when it came the mature midstream and downstream energy space, the fairy dust hasn’t seemed to work as well. While private equity ownership can bring benefits such as efficiency improvements and capital investment, it also raises concerns about short-term focus, financial risks, regulatory compliance, and community relations. The suitability of private equity ownership depends on specific circumstances, including the asset’s condition, market dynamics, regulatory environment, and the private equity firm’s strategy and expertise. There were notable collapses in the refinery space – assets owned by private equity. More recently, we have seen the sale of terminal assets, but these assets were not purchased by other terminal operators. Instead, we have seen these terminals shut down and repurposed into commercial real estate, warehouses and other “best use” transformations. While these transactions were gleefully accepted by the PE investors who profited handsomely, what they hold in store for the future of energy operators and consumers might be quite another story. While there isn’t a standard or typical earnings multiple specifically for petroleum storage terminals, it’s not uncommon for infrastructure assets like storage terminals to trade at earnings multiples that reflect their stability, predictability of cash flows, and growth potential. Sometimes, waterfront beautification or an Amazon warehouse have more compelling multiples versus what we have seen when terminals are sold from one terminal operator to another.
Alternatively, private credit can be a valuable funding option for midstream assets, offering flexibility, speed, and tailored terms that can align well with the operational and financial needs of midstream companies. The size of the private credit market at the start of 2024 was approximately $1.5 trillion, compared to approximately $1 trillion in 2020, and is estimated to grow to $2.8 trillion by 2028. This market emerged by filling the niche as a financing source for companies too large or risky for commercial banks and too small to raise debt in public markets. Overall, the growth of the private credit market has been driven by demand for yield, a lending gap left by traditional banks, flexibility in loan structures, diverse investor interest, global expansion, and regulatory changes. These factors have collectively contributed to making private credit a significant and increasingly important component of the broader credit markets. This could end up being a nice marriage for terminal operators, who seek capital to grow but perhaps do not want to be beholden to investors who either want to meddle in the weeds that they don’t fully understand or, even worse, are anxious for a quick flip and payout. At the end of the day, as the need for terminaling space – in both petroleum and chemicals – is growing with our demographic demand, the last thing we want to see are storage tanks being cut down to the ground. Private credit as a source of capital, in lieu of private equity, seems like the preferred path to travel on the road to our greater good.
It looks like Electric Vehicles are having a little trouble getting from 2nd into 3rd gear. We believe that the auto execs say that they are standing behind electrification, but the only way to pull the rabbit out of the hat is to make products customers want to buy. Meanwhile, according to the EIA, sustainable aviation fuel in the United States could increase by 1400% in 2024 if planned production additions come on stream. That’s a big wow…but what of the feedstocks? As the war in Ukraine trudges on, the toothless sanctions don’t seem to be getting any tighter as Russia has been able to find alternative markets for their crude. Half of the Chinese oil imports are coming from Russia. No wonder oil prices have been stuck in this trading range. Oil prices fell for the second straight week. Brent crude closed at $84.28 a barrel and WTI entered Friday happy hour at $82.19 per barrel. No one seemed happy at the nation’s airports, however, as the Crowdstrike bug grounded planes all over the world. Sadly, we’re still seeking a cure for such hiccups. Saying “Boo!” just doesn’t seem to be working – although maybe we should be more afraid, or at least keep a paper and pencil handy.
